The angel investor’s cheat sheet to successful portfolio building | Digital Asia
Before you evaluate and assess startups for your potential portfolio, keep these in mind
Through my personal experience in AngelCentral over the past couple of months, I observed that the amount of interest in angel investing has been increasing steadily. With the rise of equity crowdfunding platforms and activity among angel networks in this region, many more individuals are keen to explore the possibility of investing in startups as an alternative class. While angel investing should not be seen as an activity purely for making financial gains, I have found the five most fundamental things that new angel investors have to master if they wish to be successful.
1. Generate quality deal flow
No matter how good you might be at evaluating startups or sizing the market, it will be of little use if you do not find quality startups to meet with in the first place. Unless you are blessed to know many people who can bring you potential startup opportunities, it is difficult for you to meet and gain access to quality startups when starting out.
Compared to the stock market where investment opportunities are easily accessible, finding quality startups to invest takes time and effort. You will need to know how to network, position yourself as a value-adding angel investor, get exclusive invites to demo and pitch days, etc. This is why when starting out, many beginners will join angel investment networks to gain access to startups that would have already been curated for them. Overseas platforms like AngelList or OurCrowd are great options for those looking to start their angel investing journey.
2. Pick the right founders
The world of startups and entrepreneurship is complex and chaotic. People can have the best ideas, but executing them well is a whole story. Through your journey as an angel investor, you need to learn how to pick founders who are the most suitable to grow their business in a sustainable and meaningful manner.
Sam Altman, Partner of YCombinator, also believes in finding founders who are not only intelligent to recognise trends and patterns not easily seen by others, but also creative enough to constantly generate ideas for potential solutions to overcome various issues and challenges. Other traits to look at will be a founder’s ability to communicate, execution speed, and their motivation to do what they do.
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3. Invest in only what you understand
Warren Buffet, the legendary value investor who is currently the 3rd richest person in the world, believes that everyone should invest within their “Circle of Competence”. Earlier this month, AngelCentral organised a panel on deep tech investing, and one of the biggest takeaways for investors were that they should always look to understand what they are investing in. It might take some effort, but it is important work for you to do if you wish to be an effective angel investor.
While following more experienced angels through syndicates can be a worthwhile strategy for those who just started out, it is still important to have a good understanding of the market, technology and solution behind the startup that you are investing in. Stories in Silicon Valley such as Theranos and Juicero are stark reminders that even the most “sophisticated” investors can make serious and even silly mistakes at times.
4. Portfolio sizing
One of the key messages we emphasize to participants at AngelCentral’s workshops is that that angel investing is an illiquid and binary activity that is highly risky. This is why we believe that portfolio sizing is something very important that all angel investors should do.
Another general rule of thumb is to invest in about 15-25 companies. However, this presents a huge challenge for many angels, as the minimum cheque size for each startup tends to be about $50K at best. As a rough illustration, following what former founder and angel investor Huang Shao Ning noted in her blog, the cash you need for angel investing should be about 15-20% of your investment portfolio. If you invest in $50K for each of the 20 startups and leave another $50K for 10 follow rounds, your investment portfolio should have about $7.5million for this to make sense, which could seem rather intimidating for the average angel.
This is why one of the key values I see that startup investment syndicates can bring to angel investors, as it helps to effectively bring down the minimum cheque sizes that angels have to invest for each deal.
5. Evaluating and assessing the right companies
My belief is that only when you understand the 4 points above, should you look to start assessing and evaluating startups.
Generally, based on what I have read, most of the assessment frameworks tend to focus on the following: 1) People (as shared above) and execution capability, 2) Potential market opportunity, 3) Strength of solution, and 4) Deal terms.
It is my hope that the angel investing scene in Southeast Asia continues to develop and we see a lot more investors coming into the space. If any of you are keen to find out more and learn about angel investing, check us out at our website here!
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