Dear Angel Investor:
Your investment is sorely needed. Startups at the very early stages have few ways to attain the cash they need to execute on their vision. You are to be applauded and appreciated for your early dedication to these visionary founders and the risk that you take to give them a chance to succeed.
Many of you are successful business-people, having a career in the corporate world behind you, perhaps a successful track-record of investing in stocks and real estate as well. Some of you have even built your own businesses, usually in traditional industries like finance, logistics and manufacturing. You have worked hard, are intelligent, and now want to give back by helping other future leaders to make the world a better place by helping them execute on innovative new technologies.
So don’t fuck it up by being a shitty Angel.
Startup investing is completely different than what you’re used to. Your money is valuable but your advice is almost definitely less so. Your most important role beyond capital is often to introduce the startup to new customers or investors, not to be a “strategic advisor” or employee. Don’t treat a startup investment as a back door to a second career (managing a portfolio of startup investments can be though).
Startups do not operate like traditional businesses. “Profits”, “net present value”, “ten-year plans”, and “balance sheet” are fairly worthless concepts. Instead, founders need to focus on scaling, cash flow, customer discovery and story-telling as well as attracting top talent for their small team at below-market salaries. Unless you have lots of experience in the startup world it is unlikely that your experience will be directly helpful to the company, but your cash and your network can be invaluable.
Your investment is not like buying a bond or equity in the stock market. You should not get a dividend or coupon on your investment (as there is no cash this simply erodes the available equity on the cap table over time, making it harder for the company to raise follow-on funding). There should be no maturity date when you get your money back — you are in this for future capital gains or nothing. You should invest at standard terms. Otherwise you’ll make it difficult for the company to attract follow-on investors, lowering the value of the business and thus your investment.
An Angel should rarely take an active role in a startup. You should not get a board seat, although you can be on the board of advisors. If you choose good founders they can run their own shop and pull you in as needed. If you don’t trust the founder to run their own shop DON’T INVEST!
Most importantly, don’t fuck up the cap table by taking too much equity. This will most likely doom the business as no sophisticated follow-on investors will join unless the founders have enough equity to stay motivated. As a general rule the founders should aim to maintain ~70% shareholding as a group AFTER a Seed round (If there is an ESOP in place it could go to ~60%). If you have already broken this rule be prepared to lower your stake with no compensation in order to let the business attract quality investors so that it can grow. Ask yourself: Do you want a larger percentage of zero… or a smaller percentage of something that could be worth millions of dollars some day?
Startup ecosystems need quality Angel investors in order to thrive and we’ve been lucky to have many associated with Accelerating Asia, our portfolio companies, my own startups and other programs I’ve been involved with. Unfortunately, I’ve also engaged with toxic Angels who actually bring negative value to the startups they invest in and consequently are a negative influence in the ecosystem. To be fair, it’s not just Angels. I see shitty (non-standard) terms being proffered to founders by institutional investors as well, although this seems to be getting better as Singapore has acted as a locus for regional Southeast Asian and global investors and international standards are more or less applied consistently. Other ecosystems are still catching up and founders need to be aware of what the standards are and hold investors accountable to them.
If you’re a new or aspiring Angel Investor there are a number of ways to up-skill yourself. You can join one of the Angel Investor networks like BANSEA, Angel Central or ANGIN. They offer classes and can team you up with experienced Angels to help you get started, as well as vetting startups for potential investment by members. If you have friends who are experienced Angels you can tag along with them and participate in some of their rounds. You can join events like Accelerating Asia’s weekly Open House Series where our startups pitch to the audience and take questions followed by networking or become a mentor. At a minimum, take some time to read about startup investing. Some good places to start are “Venture Deals” by Brad Feld, “The Secrets of Sand Hill Road” by Scott Kupor and “Angel” by Jason Calacanis.
I hope this post is useful to some of you, because our startups need you. There are too many great founders with great ideas who fail because they cannot get access to the capital they need or to customers or other partners that can help them take their business to the next level. Founders have a ton of resources through incubators and accelerators, books and blogs and sophisticated and experienced investors like venture capital firms to help them along the way. Angels have much less to work with, but there is enough to get started and the rest comes with experience. Your first few investment will probably fail, but you will learn an awful lot and over time you’ll develop a system that works for you. Just like startups, Angel investing requires grit to get through failure; only the Angels who keep plowing forwards will succeed, just like the founders of startups.
*Target market is South and Southeast Asia