Dive into the world of an angel and hear from them on real-life investment problems that an angel may face in their journey of angel investing! Stories of an Investor is a new content series where seasoned angel investors share their stories and experiences on angel investing.
In the first session of Stories of an Investor, we caught up with Angel Investor and Partner at Endeavor Ventures, Sam Gibb. As a seasoned angel investor, Sam shared with us how building a good relationship with founders can lead to making better investment decisions. Read on to find out more!
Hello Sam, Thank you for joining us! Let us start with a little bit of background about you. You started your professional career in the finance industry focusing on public markets in New Zealand. Why and how did you make your way into the angel investing scene in Singapore and venture?
Sam: We moved to Singapore almost 9 years ago. Professionally, I’ve always been more of a fundamental investor and was leading the valuation team at a private equity fund and then responsible for picking Asian companies for a long-short portfolio based on themes that we were experiencing or expecting. At that time, I was restricted from investing in public equities because we were a regulated fund. Instead of getting frustrated by the situation, I asked myself “What would you be disappointed that you didn’t do in 5-10 years?” At the time, the government was trying to prime the venture ecosystem. I don’t necessarily agree with all of the measures that they’ve taken but it’s a start. Considering what was happening, I could see that we were at the early stages of the venture industry’s formation in Southeast Asia. I wanted to be a meaningful part of that ecosystem as it developed so I started to look for opportunities to angel invest (TechCrunch wrote about this recently – I was likely a bit ahead of the curve).
It was harrowing at first and I ended up joining various angel investment groups. The industry didn’t evolve as quickly as I would have anticipated and as a result, it still feels like there’s an abundance of opportunity and potential that isn’t being exploited as well as it could be.
Seeing “the death of value investing” first hand and perceiving that any meaningful performance in public markets would likely be attributed to those that are willing to look wrong for extended periods of time (i.e. those that aren’t reliant on external capital, which could be withdrawn after prolonged underperformance) or those that are willing to take a qualitative view and overlay quantitative execution, I was looking for an area where qualitative factors would be more important.
These realizations led me to focus more time and effort in the venture space and start a small seed-stage sector-agnostic fund. When you’re working with start-ups, you’re able to take a longer view than most and you’re also able to affect the outcomes. If a public market investor approaches the management of a company, there’s typically a confrontational relationship because it’s perceived that the investor doesn’t approve of management’s course of action to date. However, when working with start-ups, I get to see a lot of mistakes that have been made and can “see around the corner” to help founders to navigate issues that are going to come up. The relationship is far more collaborative than confrontational. Also, the work that I put in to help the start-ups succeed, creates a virtuous cycle as more opportunities are referred in.
As a professional fund/portfolio manager, how would you advise angels to learn about different verticals to diversify their portfolio?
Sam: This is a difficult question (and I’m not just saying that to “buy time” because this is being done via written Q&A)… Hahaha. It’s difficult because I’d say that most angels, they should focus on areas or industries that are within their area of expertise. If we’re looking at a range of industries, I have an edge over most because professionally, I was always sector agnostic so I had to understand what the key drivers of any industry and what the best and worst companies in an industry looked like in a relatively short period of time.
If angels have some deep experience in an industry, they will have a thorough understanding of the opportunities in that industry and will be able to help founders navigate the ideas maze. Alternatively, I’d say that if an angel has some experience in marketing, then they should look to partner with companies that need help with that aspect. This is a reason I tend to gravitate towards FinTech opportunities because I understand the industry and can typically get my head around new ideas far faster than other sector agnostic investors would be able to.
Asking “how best to diversify a portfolio” suggests that the angels are largely investing in an attempt to create a financial return. I’d say that angel investing for a financial return is a really poor reason to get involved because it’s difficult to get the right level of diversification quickly or easily and returns are driven by power laws (one or a handful of investments account for a majority of the returns). In my experience, most angels get burned out on the space before they’ve been able to accumulate a sufficient amount of diversity to reduce the probability of a substandard financial result. If they’re looking for a financial return, then I’d argue that it’s better to look at different means to achieve those goals.
First time entrepreneurs may not be great at managing a company. Based on your personal early-stage investing experience, how often do you think an investor should sit down with a founder to address any red flags?
Sam: This was probably the largest mistake that I made in my first angel investment. I figured that the VC would have been more hands-on and spent more time with the founders to address any management concerns. I knew that there were issues and I wanted to speak up and tackle them but it was my first investment and who was I to know? It’s frustrating because my concerns were well-founded and I could have had more of an impact if I had been more involved earlier.
To be clear, founders don’t just raise a red flag when things are going badly. This is part of the issue – when things start to go wrong, the natural inclination for most people is to withdraw into themselves and shut out anyone that could criticize them (not all investors are “friendly”). To be effective as an angel investor, it’s important to have a relatively high level of rapport with the founders, so they know they can speak to you when things aren’t going well. I find that it’s useful to have a weekly or fortnightly call with each of the founders to check in, see what’s happening, and give appropriate guidance. This isn’t necessary when things are going well but it builds the foundation for when things turn.
When an issue pops up, address it tactfully and promptly. I tend to work with founders for a number of months before investing so I can understand how they deal with adversity and how open they are to suggestions. Building rapport and understanding whether you can work with founders are going to be far more beneficial than trying to swoop in when you hear about an issue. When you hear about something, if you’re too far removed, it’s typically too late.
As an experienced angel investor, what do you think are some angel investor behaviors that are bad for the start-up ecosystem?
Sam: The behaviors that I find the most frustrating are around valuations and engagement. There are some early-stage investors that will try to push founders to get a disproportionately large stake in the company at the seed-stage. If this isn’t rectified early, it can be detrimental to the company as professional investors have prerequisites around the proportion of a company that a founder should hold when it’s raising capital. This behavior is only beneficial for investors if they perceive that the market or opportunity isn’t sufficiently large and they need to hit financial hurdles – If this is the situation, I’d have to ask why they’re even investing in the first place.
The other behavior, which isn’t necessarily a net negative, is when I see naïve early-stage investors throwing too much money or enabling a valuation that’s too high for a company. If early-stage founders have too much capital, fiscal prudence goes out the window and the level of innovation and creativity decreases proportionately. This also makes it more difficult for the founders to raise a subsequent round as they haven’t “grown into” their previous valuation and don’t want to accept a down round. This can result in founders searching for capital for longer than would otherwise be necessary, a reduction in momentum, and an increase in opportunity costs.
Do you think pattern recognition (certain traits or trends) of founders & start-ups are a myth? Have you ever invested purely based on pattern recognition of a founder and do you think it is sustainable?
Sam: Early-stage investors are always trying to sell pattern recognition as an investable edge and I don’t know if I’m a buyer. There’s definitely a pattern in the personalities of younger early-stage founders that I like to invest with but that could be a result of my personality (n.b. it’s not like I’m trying to invest in people like me, they’re almost polar opposites on some traits). However, beyond fulfilling some key traits, there are a number of different people that could be successful depending on the challenge that they’re tackling.
My early-stage investing experience is also limited to Southeast Asia. If I were investing in a larger developed market, I have no doubt that I’d be wrong about founders and ideas far more often than right because there are so many heterogeneous interests and issues that people face. Founders that have some insight into those issues through their experience will be well placed to serve those customers but they might not fit into my preconceived notion of what they should look like.
When I see companies list or raise mega-rounds, I always like to ask myself “Would I have invested at the time if I had the chance based on what I knew/know now?” You’ve got to have an anti-portfolio to keep yourself honest. There are times when this answer has changed because I changed the framework that I use to make those decisions – this is always humbling.
I started with a simple framework – Are the founders humble and teachable? Is the idea something that is intuitively appealing to me? Can I meaningfully make a difference to the founders? The framework has changed slightly over time but if an angel investor has some idea of what’s important to them, it will be easy to find situations that fit.
What are some mistakes you made when you first started angel investing that we can learn from?
Sam: I touched on this above but the largest one is – Always ask questions and don’t assume that someone knows more than you because they’re “more experienced.” Experience is typically a useful heuristic but it’s not definitive. People’s experience differs and you could have a different insight or perspective than a “professional investor.” In those situations, always feel free to ask questions and allow your voice to be heard. I have had situations where I was investing as an angel and found out that established venture capital firms were investing based on less due diligence than I’d done.
To end the session, what are some of the trends/verticals that you are watching closely in the coming years, and why?
Sam: At the moment I’m focused on FinTech, Big Data/AI, and Digitalisation generally. I prefer to invest in B2B companies because I’ve found that B2C plays are generally reliant on catching the zeitgeist and that can change relatively quickly unless the founders are able to capitalize on the moment. These are larger themes that capitalize on the issues that we’re seeing in the surrounding countries and also globally.
When you consider that banking penetration is still only 50% on average as compared to 95% in the US and UK and the needs of consumers in Southeast Asia are different to those in developed markets, there’s a massive need for financial innovation and FinTech solutions here.
Cloud adoption in SEA is still <20% so we’re still in the early stages of digitalization.
On the Big Data/AI play, we’re already seeing more papers published in Chinese than English. It’s likely a fair assumption that a majority of the Chinese researchers will be able to access the English papers but it’s unlikely that the reverse is also true. This makes it probable that we’ll see more developments in countries that have strong intellectual property protection laws and natural access researchers fluent in both languages i.e. Singapore.
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