What is Angel Investing and How does Angel Investing work?
In current day context, angel investing broadly refers to private investors, either individuals or family offices, who provide early capital to support new businesses which are typically in highly scalable technology sectors. These early investments could be done via a direct equity stake, or as convertible notes which will be converted into equities when next priced rounds come along.
The risks of failure for such early-stage investment is relatively high. Considering the early nature of the business stage, and usually, the founders could have limited prior business knowledge. Many a time, angel investors support such startups beyond pure financial return expectations.
As shared at our “Why Angels Invest” seminar, many active early-stage investors see it as a way to pay it forward, keep themselves engaged, and abreast of business/ industry developments. A high proportion of angel investors are retired or exited entrepreneurs – angel investing is a good way for them to mentor the next generation founders, tapping on their own journeys. Angel investing is a good way for them to find their next gig.
Angel investment or such early investments allow non-founders to participate in the early journey of a business, and very directly make an impact. This impact is beyond the modern-day impact investment discussion (think sustainability and reducing carbon footprint) but very directly have your two-cents worth of direct input and effect on the founders’ strategies, plans, and mindsets. This does not contradict what we at AngelCentral advocate as good angel etiquette and mindset. This is indeed a big reason why I personally enjoy this so much – I believe I can make a positive impact and help bring about good business practices and values from our next generation business leaders.
(Fun fact: I was curious about how the term angel investing came about. According to Wikipedia, “Angels” originally used to refer to wealthy individuals (more commonly known as “patrons” now) who supported theatrical productions.)
Why should I Angel Invest? (or why not?)
Let’s start with the easy one – why you should NOT angel invest.
It’s no secret that most startups fail – citing US numbers, as much as 60-70% of startups fail within their first five years of operations, and less than 80% of startups actually survive past the first two years post-incorporation. So this directly translates to investors writing off their investments to zero! Angel investing is a subset of private investment, a direct opposite of public equity trading. There is no trading (in Southeast Asia, and limited secondary market in the USA) or market for such private investments. It’s different from owning and trading a listed company’s shares when you realise something is off.
Some say that the amount you use for angel investing should be your “play money”. The way I put it to our AngelCentral members – if you would lose sleep for more than a week for the amount you need to write off, don’t angel invest. It’s impossible not to be upset as it’s hard-earned money after all. It’s ok to be upset for a day or two, but it’s not worth your mental or health cost if you would be upset for a longer period.
Also, no angel investing if your significant half would be very upset with you for losing the sum. Family and matrimonial peace most important. 家和万事兴！
A quick bullet list for why you should angel invest:
- You have already designed a comprehensive investment portfolio
You have a clear investment strategy, return expectations and plan mapped out; in this sense, you totally see angel investing as an investment asset class to diversify your overall portfolio; and,
- You are looking for “multiples” of returns and not just “percentage” of returns
A balanced portfolio typically give you 4-6% annual returns; and,
- Your risk tolerance is high and you understand high-risk high reward; and,
- Besides the cheque, you believe you can bring other values to help the founders grow.
How to start angel investing? And how much?
Angel investing requires a lot of homework and research. To get started, here are a couple of tips:
- Join an angel investment network or a network dedicated to angel investment
The purpose is to learn the ropes, meet other angel investors, of course, to get deal flows. There are two key ones in Singapore – BANSEA, and AngelCentral. Come meet us over coffee chats to find out more about us. The chats are organised fortnightly, either over zooms as well as face to face chats
- Start attending pitch days and learn about the start-up investment processes and terminologies.
You do not want to keep interrupting the founders in their pitch to explain what is MMR or TAM.
Note of caution: ALWAYS have direct sessions with startup founders to better understand them and their motivations. Think of it as screening for hiring, and have 2nd or 3rd interviews when you need to hire the key member for your team. Also, do not be too eager to whip out your cheque book after hearing the first pitch! Please sit through a few more with different companies to get a hang of the process.
On the practical question: how much do should I allocate for angel investing, please refer to the above link for an earlier article I wrote out on portfolio design and fund allocation.
To provide a practical viewpoint, most startup founders ask for a minimum of SGD $50K to $100K per investor commitment. A simple reason for that is to have a clean and not complicated shareholder table to allow for future investments. (yes, the simple and reasonable shareholding structure is one of those things that subsequent/professional investors look for)
What to invest in?
Start with a vertical relevant for yourself – be it Fintech, Agritech, or Healthcare related space. A good way to think of this – what’s your functional or industrial expertise? When you chat with the founders, what’s the expert advice that you can bring to them besides your money?
Definitely, you should diversify beyond your expertise areas – check out our Deep Dive Angel Investment Workshops – we hold quarterly deep-dive sessions on different verticals to help angels diversify. Such contents are usually taught by well-known startup founders from selected verticals.
The makeup of your private investment portfolio should be underlined by your expertise and what you are familiar with. In addition to functional skillset, it’s also important to look at where the business is based/intend to grow in. Some of our members are based in Europe, but they used to work in Singapore. So they have enough understanding and context of SEA markets to support their understanding of the markets here.
Personally, I shy away from outside of Asia startup deals. Some rationales: Lack of market and cultural nuance understandings in foreign geographies, and of course tax issues.
Where to find deals?
As shared above, existing angel investing networks are probably the easiest way to start.
Register your angel investment interests with the many incubators/accelerator programs, and keep an eye out for the startup events in the market. There are quite a lot in the Southeast Asia ecosystem, and the key tech platforms hold their annual region events to support startup fundraising too, eg. Echelon by e27 or TIA regional conferences.
I have found angel investing a very rewarding learning journey for myself. Via my personal portfolio of 32 (active companies 25+ odd) companies, I have learned both hard knowledge (industry, business, regulatory, country/culture, etc) and soft skills (dealing with new age mindsets, other investors, new practices, etc).
I had to write off two investments during the COVID period but also glad to observe the quick turnaround strategic moves made by a few others. Was upset when the decision was made but look on the bright side, with proper allocation and bite-sizing, my other 20+ companies are still doing well and I am glad to be constantly learning via/through them.