Kochi: The cardinal sin in making investments across asset classes is expecting excessive returns in a short span of time. Successful investors will not differ to agree that the defining quality of a disciplined investor is patience. While the startup segment is gaining traction as a new entrant in the financial assessment classes, the rules of engagement are not very different either. According to Revathy Ashok, startup evangelist, angel investor & co-founder, Strategy Garage, there are a number of factors that investors, as well as entrepreneurs seeking funds, should be mindful of while building an investment relationship. She was speaking at the Angel Investment Masterclass at Seeding Kerala held in Kochi recently.
Startup evangelist Revathy Ashok lays out a number of factors that investors and entrepreneurs seeking funds should consider
First and foremost, for an investor, the decision to invest in a startup should be driven by the passion for entrepreneurship. The key objective of any startup as per industry demands is the desire to disrupt the status quo. When looking to invest, a clear understanding of how it would bring change in the existing paradigm is paramount. “That’s what excites me when I work with young founders. If you invest money as an angel you have to be willing to put time and effort to make that business succeed. If you are not ready to spend time with your entrepreneurs, then you might as well put your money elsewhere,” says Revathy.
INVESTING IN STARTUPS
What does it take to invest in startups? A clear understanding of the answer to this question is crucial. For starters, investors who decide to transform into angels must be ready to shell out money heavily. This, according to aces in the field, is governed by the understanding that only a handful of startups emerge winners who eventually take the market home.
“Don’t assume that all investments you make are going to become unicorns. Just look at the number of unicorns. That shows the chances of making it to the top,” she says. Investors worldwide say chances of a quick exit after making some handsome and fast returns are highly unlikely. Going by the statistics and history of successful startups, the average gestation period spans anywhere between five and eight years. However, funding the promoter does not mean unloading cash in a tranche. Revathy says, besides understanding the consequences of a lockup period and ill-liquidity, the angels must adopt a portfolio approach of funding. “You need to know when and how you spend the money and whether to spread it over a span of time.”
Addressing the “How To?”
For a person who is new to the world of investments, or is being enticed to fund a startup, the key is to not jump right into the water. Instead, make a few small investments to have a better understanding of the dynamics of various asset classes and instruments. “Over time, you will be able to make a better assessment of trends and technologies,” says the experienced angel.
Working forward with the help of an investor network is another way. It will help source good deals and ensure the flow of information, helping the investor to a have better understanding of domains which s/he may not be well-versed in. “Don’t pick a domain to invest in unless you are eager to understand it. Largely, people will have a diversified approach. Don’t get carried away by the buzz words,” she stresses.
Place yourself in 2021
The India story is still strong and consumption drivers are favourable, however, the investor should be mindful of the sunshine sectors and sectors on the decline in the market.Revathy advises to focus on the shift in consumption and market patterns. “Google taught us to search. Facebook taught the power of social media. Online payment gateways of train/airline bookings popularised the power of transaction and Flipkart leveraged it for online buying,” she observes.
Importance of a Good Team
One of the priorities while evaluating the worthiness of a startup is its team strength. It becomes an inevitable part of any growth story as the story itself is a long-term plan. Investors, according to Revathy, generally prefer an ‘A grade team with a B grade idea than B grade team with an A grade idea.’
How do you figure out it is a great team? “If you are hedging your bets with a multi-disciplinary team, two to four is a great number,” she recounts from her ongoing and past associations with startups. Also, the existence of a competent advisory board is yet another factor that increases the accountability of promoters.
Otherwise known as Founder’s Syndrome, it is one thing both startup managements and investors need to be wary of. While it describes the rise of problems in an establishment primarily due to incompetent decisions made by the founders who wield disproportionate power, Revathy also observes it as a result of “the inflated sense of ego that stops an entrepreneur/founder from reaching out to investors for help when they are stuck”.
Investors count such actions leading to the ‘radio silence’ from the promoter’s end as a sign of trouble.Stressing on the importance of keeping investors in the loop and maintaining good relations, Revathy says that investors should be able to help the entrepreneur who reports trouble in their projects.
What Investors will do?
Ideally, the lead investor within a shareholder network should do monthly reviews of balance sheets and tractions, besides keeping in touch with the startup regularly. Startups which have accessed funding should grant access to the investor to understand its progress. “Lead investors can help influence outcomes and oversee the governance of the startup.”
Exits for Angels
Even though well-informed angels may not press for an early exit, startups should be aware of inevitable exits and those prompted by exigencies. The opportunity to exit also depends on the quality of the companies. Startups can facilitate exits for angels by bringing in venture capital. According to Revathy, who is a part of Indian Angel Network, a secondary market created within the network can also facilitate exits. “Partial exits are also possible while hoping for a billion dollar valuation,” she says.