What to do and not to do as an angel investor

In an earlier posting here, I covered 7 good reasons to be an angel investor. In this post, I will attempt to explore the best possible approach to being an angel investor, an early investor in a startup idea or concept.

There are a few guidelines about angel investing that one could find on the internet but most of them originate from the US and are focused on the US only, whereas this write up will be from an Asian perspective.

Angel investing is not new to Asia. Typically, the investors who supported an entrepreneur (or a business person) at the beginning used to be friends and relatives. However, this may not be a good practice, especially if it’s in innovation and technology. These investors usually invest their money based on emotional connection and relational obligation than on the merit of an idea. Angel investing, based on the merit of an idea, is a new trend that evolved in the West and is catching up now in Asia. Given a conservative Asian culture, lack of trust is the main reason people won’t invest into an unknown person or entity.

A few angel investor networks such as BANSEA in Singapore, Indian Angels Network, Mumbai Angels in India are doing their bit to support aspiring and talented entrepreneurs by investing collectively.

So what is required to get started as an angel investor?

Compared to the US or Europe, where human resources and operating costs are high, Asian entrepreneurs can get an innovative product or solution out at much lesser cost and further sustain the initial traction. Technically, these days one would require as low as US$25k to get started with co-investing in an idea stage or proof-of-concept stage technology startup. But angel investing is more than just investing in one startup that could be a single point of failure.

It is ideal if an angel investor allocates at least US$100k to co- invest in 2-3 ventures. Unlike in the US, there is no need in Asia for an angel investor to be an accredited investor although being one may help in better managing the portfolio and mitigating risks. The investor should not allocate more than 20% of personal net worth in angel investing as it is high risk, illiquid investment. Theoretically, to allocate US$100k, your positive net worth should be US$500k.

Net worth (NW) in this case may be calculated as Personal assets (A) after deducting value of your property where you stay (H) and further deducting personal liabilities (L).

(NW=A-H-L)

From the above, it is evident that if you are looking at investing in a second property after having cleared your liabilities for the first one and are sitting with surplus cash then it could be worth evaluating to invest in a startup! However, the most ideal approach of seasoned angel investors is to allocate a maximum of 20% of their total investment portfolio for startup investments.

Further, the allocated $100k is not invested in one startup. Instead it could be a co-investment spread to around 3 startups with $30k to US$40k each and allocating around US$5k to US$10k for sourcing of good startups and other miscellaneous cost of managing the investment until the exit.

What I should not do as an angel investor?

Most industry executives add very good value to the startup especially when they are investing in a complimenting product or service in the industry they serve in. Their domain expertise and professional connections they bring would be invaluable. However, one has to be careful not to be involved in a startup that directly conflicts with the business interests of the current employer. Do not get involved without adequate disclosures to relevant parties whom it may affect (most importantly, your spouse!).

A few industry executives come with a baggage full of ego that would make them fiddle and even claim the startup as their own! Angel investors who understand that they are supporting the venture from outside and let the founders run their venture without being hindered are the ones to reap the best out of their involvement and relationship.

All said and done, angel investing is a combination of instinct and foresight (also to some extent hindsight). And yes, angel investing is also more meaningful than throwing money at a casino. Happy investing!