Angel investing is being discovered as an asset class in India. As private valuations rise, stories of early investors making >100x do the rounds, and real estate and the stock market falter- there is all the more reason to think about this if one has some cash to spare. At the same time, the volume of startups is growing, thousands being created everywhere and it can be really painful to cut through and have a method to the madness.
I wanted to share some thoughts on the how and certain rules. Before you start, remember: You could lose all your money and there is no assurance of liquidity- so be prepared to invest only a small single digit percentage of your net worth in this asset class.
Also please think through the motivations of why you are considering to do this: making money can be one for sure, but there are many other motivations/benefits- learn about the latest trends, make someone realize their dreams, etc.
Given the high mortality rate it may make sense to not just invest in one or two deals but in 8-10 deals over a year or two and then take stock of where you want to go from there.
Things to look for:
- Try to initially invest behind a lead who has credibility and is also putting in a fair chunk of the deal (10-15% or more)
- Check if the lead was also an investor in the last round, this can create a conflict of interest on the valuation and terms on the deal.
- Do you understand the opportunity? Have you spoken to the founder. Its important not to just do this on blind faith.
- Helpful/not necessary if the deal is referred to you by a credible source; you can also source deals from platforms which curate deals to give you that added assurance (e.g. Equitycrest)
- Be comfortable with the valuation of the deal, do also realize that a 30%+ dilution in the angel round can be counterproductive in the long-run, so a low valuation is not always a good thing.
- Do not get hung up over too many other terms and rights other than the basics: valuation/dilution and Liquidation Preference (to a lesser extent). Too much time is spent negotiating so many terms which are anyways going to be overwritten in the next round (if the company does well), else its a write-off anyways so why bother. Also speed is very important to the success probability of a startup and there is no room for wasting time on things that do not matter.