How to build a successful early-stage startup portfolio
CRAIG BRISTOL DIXON
More and more people are thinking about investing in startups, but they often have a hard time starting out. Aspiring Angels often have questions like:
“How do I meet good startups?”
“How do I determine what a “good” startup is?”
“If I find a good startup how do I invest in it? What terms and what paperwork should I use?”
Like most things in life being a good startup investor requires some planning and some work. Here are a few tips that might get you on your road to startup investing more quickly and with greater success:
At the end of the day the best startup founders want to work with Angels who “do deals” and who are “founder-friendly”
Let’s unpack these terms. Angels who do at least several deals per year are considered more worth the opportunity cost of taking meetings as a startup founder will have greater confidence that the interactions could lead to a deal. If you only do 1 or less deal per year then it’s very unlikely that you’ll be investing in their startup and so they may calculate that it’s not worth their time.
In Singapore, good Angels invest at least S$25,000 in several startups per year while the best invest at least S$50,000 in multiple startups per year. Some of our Limited Partners invest S$100,000 in 5-10 startups per year. Being an active Angel also brings other benefits such as experience and partnerships with sophisticated deal sourcers like Venture Capital firms who may bring deals to you to co-invest alongside them. Essentially, the more deals you do, the more good deals come to you instead of you needing to seek them out.
Founder-friendly means that as an Angel you invest at standard terms that are fair to both you and the founder. Startup investing is unlike other investments that you may have made in the past. In an equity transaction for instance, there is a binary win-lose outcome, where one party earns a positive Return on Investment (ROI) while the other party receives a negative ROI. This does not work in startup investment. If you take too much equity too early (by giving a low valuation for instance), then the startup may not be able to raise future capital and could fail. You’ll need to learn what proper terms are for the startups that you are considering investing in.
Generally, a pre-Seed non-institutional investment round should not take more than 10-15% of the capitalisation table. An Angel should not get a board seat and there should be no reserve matters where the startup has to ask you for permission to spend money, hire/fire, etc. There should be no tranches, KPIs, ratchets or liquidation preferences. The easiest document to use is a SAFE note. If you become known as an active founder-friendly Angel then you’ll soon find that people are recommending good founders to you and the job becomes much easier! Like most things in life, reputation is paramount.
Lastly, get to a decision quickly. There is little use in doing extensive due diligence on an early-stage startup. There simply isn’t enough data. If you take more than a few weeks to give the founders a “yes” or “no” then you are likely wasting their time and yours. Many investments in Accelerating Asia’s startups happen in hours. Investors come to our pitch events, see a startup they like, arrange a meeting the next day and literally decide on the spot. We then help facilitate the investment between the parties including paperwork and terms.
How to get started
If you have yet to make any Angel investments or have made a few but feel like you need some help, here are some options to consider:
Join an Angel investing group. In Singapore there are several, but BANSEA and Angel Central are the most active and reputable. In Indonesia check out ANGIN. These groups offer education, filter startups for potential investment and sometimes put together syndicates that you can join. Syndicates are a great option for new investors as there will usually be a seasoned Angel leading the round and performing due diligence. You can learn from being a part of the process, but de-risk your earlier investments by teaming up with more experienced Angels. Be careful to vet your preferred Angel group carefully. They each have their own culture and some can be mostly talk shops with less value for someone aspiring to be a high-quality Angel.
Originally posted on AcceleratingAsia.com