A huge number of startups and unicorns have been popping up in South-east Asia and that has fuelled a wave of angel investing clubs in Singapore. Angel networks executive agrees that the growth of privately held startups valuation is USD$ 1 billion or more (this is what they call a unicorn company) causing the sprouting of these investing clubs.
On 11th June, Shao-Ning was interviewed on MoneyFM 89.3 The Breakfast Huddle by Elliott Danker, along with Ramesh Raghavan, Vice Chairman of BANSEA and Veronika Kuznetsova, Director of Investor Relations at Investible. Here is an edited excerpt from the interview:
How does the club make money?
Ramesh: BANSEA is actually non-profit which runs largely on membership fees. We provide learning programs on how to be an angel, organized programs on how to do due diligence and also organize events where successful entrepreneurs talk about their journey. Joining BANSEA is by invitation only and/or by word of mouth, where existing members bring new members along. Every member has to be an accredited investor.
Veronika: Investible is slightly different and we focus on helping our members achieve their investment goals and to build a successful well-diversified investment portfolio. We work with angel investors who have already made the decision to build a portfolio of early-stage investments. We collect a commitment up front that will later be re-distributed to a curated selection of deals that we offer to the investors. This way, we ensure that the decision making process is fast and efficient, ensuring startups receive their funds in time and investors build up a very suitable investment portfolio for thremselves.
Shao-Ning: The first thing that we offer the angels is a pipeline of dealflow. Next, we hold various workshops through our education series where we talk about the fundamental and the legal aspects of angel investing. In addition, we run sectorial deep dives. For example, while I am experienced in the B2C and e-commerce space, I would need someone to guide me along when investing in hardware startups. We have run a couple of deep dive workshops, educating angels on the hardware and ecommerce space earlier this year. We also have SaaS and a FinTech deep dives coming up. Lastly, we help our members to come together to invest, with the idea that with a bigger number, you can have better governance.
What are the criteria for investors to join such a club? Any perks that the investor can get when you join such a club?
Ramesh: I think the first perk is the opportunity to give back to the community through mentoring, coaching and on top of that you get potential access to deals. Secondly, you have the opportunity to learn about new technologies through the various talks that we organize. Thirdly, we also offer access to our angel networks in the different parts of the world. We are actively working with angels in Vietnam, Malaysia, Thailand, and Europe. It gives them the opportunity of not only looking at deals there but also at how we can help these startups in building their business by bringing them to Singapore.
What should investors expect in terms of success rates? What do you tell them?
Shao-Ning: Angel investment provides high returns but also has a high risk. Before coming into this field, one should have very clear portfolio thinking and recognise the potential reality of a high failure rate. If all your angel investments are written off, your lifestyle must not be affected. The first 12-15 months the outcome is very binary. Here, you are talking about multiples of returns but the multiple could be 0. Generally, you will know whether you made it in the first 15 months. It is all about patience for the next 5-8 years after investing, before you are likely to see your returns after.
Veronika: There are a couple of things that are very important for angel investors to consider, and one of them is the portfolio diversification. If you have to pick a handful of startups, the likelihood that you picked the one that will be a unicorn, is not as likely as compared to picking a lot of portfolio startups. Having 1 in 10 that will give you the return is more likely out of a portfolio of 30. Therefore, angel investment is not just a once off game. It is something that you will be required to do for a couple of years. The second thing which you have to consider is follow on investments. After funding a startup, you can observe if they are getting tractions and how do they manage the company, then you get access to follow on your investment. This essentially doubles down on the winners and it is always a good strategy that we enable through angel investments clubs as we maintain the access to these follow-on rounds.
Turning to investors who choose to exit, how long do they usually wait to get their money?
Ramesh: If you are in this angel investment game, 5-8 years minimum. That said, most of the angel investors will look at angel investing as their asset allocation strategy. If you have $100 to invest, you put $50 in stocks, $20 in bonds, $10 in something else and maybe $10 in angel investment because of the high-risk part of it. The rule of thumb is to put 5-10% of your net worth in angel investment as the probability of going to 0 is really very high. Secondly, you have to create a portfolio for the long term which many of them mentioned. People will need to have long-term patience of the capital and it is better to assume that you will have no return of your money upon investing and when good things happen, then that’s great.
How do you know or how do you spot the potential for something that is big? Is there something unique that you look out for?
Ramesh: A lot of it is going with the gut and trying to figure out what the feature will look like 10 years to 15 years down the line. It is also a function of how you follow industry and a particular challenge that the industry is facing. It’s a paper trade right after someone put in the money. Some of the big-ticket ideas are, for instance, Artificial Intelligence where you think that there are certain features that will drive the future of work, the future of living, etc. Those are big-ticket ideas and it’s really hard for anyone to identify now as lots of it is on the execution.
Veronika: At Investible, we have been doing this for 8 years to capture unicorns. One in Australia and another in the US. I have to say that in the beginning, those deals did not look like obvious deals to me. We developed a robust due diligence process called the Investibility index which considered multiple data points. We assigned to the startups that we screen and throw into our funnel and eventually we hope that it could be turned into a formula which increases the likelihood of spotting that startup with great potential. Also, an investor should be warned to not join the herd as the eventual winners could very well be the ones that most would not be able to spot.
Once the club has found a startup with such potential, what’s the next step? How do you match it with a potential investor?
Shao-Ning: What we do is that every month, selected startups will pitch to the members. If an angel is interested in the startup, they will initiate a conversation with the startups. There is no matching or no decision made on behalf of the investors. Also, discipline is also a key factor and it goes back into the portfolio management and the bite-size management. The reason why I started AngelCentral was that I have actually been angel investing for the past 5-6 years. I have invested in about 26 companies and these 26 companies are from a pool of 300-400 companies which I have met. So, it’s both discipline and hard work as it takes a lot of background understanding and researching.
Any advice for startups in Singapore who are interested in getting an angel investor?
Shao-Ning: I think you should start by looking at solving a problem that you feel for. If you do not feel for the problem and take on the idea just because it’s the fad. When the journey gets tough, you will lose your northern pole. Once you lose your direction, it’s very hard to come back up. More than a career choice, it’s a life choice, so you have to know what you are doing and you have to be prepared for the journey of ups and downs.
Veronika: The startup founders themselves have to do their due diligence on the investors as well. At the end of the day, an investment is a long-term partnership. It’s important that you choose wisely because the investor will have quite a substantial impact on the way you build your business. If you consider Investible as a good partner, you can always submit a ready pitch deck on our website. We will send it to our investment committee to review it and hopefully get in touch.
Ramesh: Firstly, the need to find a problem that is big enough that’s more of a painkiller. Secondly, it’s a good idea to bootstrap before you approach angel investors. Get some revenue traction and reach out to the different angel groups in Singapore and I’m sure things will work out.