Investment Philosophy and process for Angel Investing

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My journey of making Angel Investments started a couple of years ago and I made my first investment in September 2017. Another 3 investments were made over the next 18 months taking the tally to 4 Investments by March 2019. The pace of Investments was very slow given my responsibilities at Hero Enterprise. The last 12 months have been truly enriching for me as an investor and I am expected to close with 24 investments by March 2020, of which I have already invested in 18. My hit rate of Investments is close to 80 % (24 out of 30 Investments proposals), I have also made two follow-on investments. I am told by many of my friends that both the strike rate of 80% and 2 investments/month is very high. I am currently engaged with two of these start-ups as their advisor/ coach. All of my Investments are listed on my website under the tab Angel Investments (read more). 

I have also had a chance to interact with more than 150 Founders during this period and have enjoyed every bit of my time spent with these Founders. These interactions make me feel young and energetic, which is in line with Version 2.0 of my journey as a 21-year-old student of Psychology, Philosophy, and Digital Technologies. There is a lot to learn from these Founders.

I am often asked as to how I got into investing in start-ups as my past experience has been in doing very large and complex transactions/ strategic and long-term partnerships. My response has been that this is a consequence of my “Higher Purpose” which is “Be Happy and spread happiness around the world” (Hasoon aur Hasaoon Sare Jag main Khushiyaan Phelaaon). It is my belief that the alignment of my investee company founders with my higher purpose is very high as the founders and their founding team start their business building journey with a clean slate and are looking to give back and make a positive impact in lives of people . I am not focussed on any domain as my core investment thesis revolves around DNA alignment with founders, their Aspiration, Passion, Ability to Execute and Scale, Agility in making course corrections, Learnability and Culture built around Trust and Respect. There needs to be a Dil Se (from the Heart) connect with the founders and their business

I have shared in one of my earlier Blogs the meaning of “Dil Se” (read more) Investment. I am driven more by Right Brain (softer aspects, Bio and Chemistry) than Left Brain (Hard data, Physics and Maths) as a result of which my focus is on understanding the founders and their psychology and philosophy behind the business building. I try to get a high-level understanding of the business model and cash flows as I assume the lead Investor/s will anyways do their own diligence on business, commercial, legal and financial aspects and would also finalize the terms of engagement including valuation. I have never focussed on valuations as this is market-driven and in any case, my investment is rarely more than 5 % of the total round being raised by the Founders. I try and enjoy the journey of the founders. Creating a business and making an impact is as important or even more important than the returns itself. I am not driven just by returns. While most investors believe that only a few investments will do well, but given my different definitions of success, I do not believe that any of my investments will fail.

Based on the above and to be on the same page I have attempted to outline the Investment Process. Having clarity in the process ensures constructive use of the only scarce resource “Time” of the Founders, this increases the “Return on Time Invested” (ROTI) and helps in achieving desired Outcomes.

The Process revolves around four areas:

  • DNA Alignment with the Founders
  • Evaluation of Business
  • Feedback from Lead Investor/s and some shareholders of previous round
  • Documentation, Compliances and Diligence

Here is a brief definition of the above:

Alignment with Founders 

  1. Listening to their journey so far, and their learnings from some of their life experiences 
  2. Aspiration, Purpose, Value System and Culture
  3. Their ability to build capabilities and hire the right talent 
  4. Learnability and agility to maneuver the journey and make course corrections, as per the needs of stakeholders
  5. Inter-se Alignment amongst founders, their roles, process of conflict resolution and consequences thereof and if any formal document like a Founders agreement is signed 
  6. Philosophy and Process of choice of Lead Investor and Advisors if any

Evaluation of Business 

  1. Story behind creation of business
  2. Understanding Business Model, Revenue model, Unit economics etc 
  3. Long term sustainable advantage of the Business
  4. Their understanding of challenges, capabilities and alliances required to scale
  5. The ability to stay afloat within the available Cash Flow ( Frugal) 

I would ideally prefer to get the Founders perspectives on my blog “Founders and Owners Dilemmas” (read more) for A and B. 

The above process may take 3-4 hours and I prefer a face to face meeting with majority of the founders.

Feedback from Lead Investor/s and some shareholders of previous round

  1. Understand their engagement and the process followed to arrive at the decision to invest and their conviction on the business
  2. Perspectives on the SWOT of the Founders and the Business
  3. Methodology to arrive at Valuation 
  4. Current Commitment by the lead investor and their take on diligence 

Ideally the lead should invest at least 1/3rd, preferably close to 50%.

The meeting could be over Phone or face to face if possible

In case Lead investor has not been identified, I can give a soft commitment to take the next steps

Documentation, Compliances and Diligence

  1. Once the Lead Investor has been finalised, would expect the founders to share the term sheet 
  2. Get access to DD reports and compliances to see if any red flags 
  3. Build-up of Cap Table
  4. Review the shareholders agreement with a limited perspective to understand differential rights if any to any of the investors, liquidation preference.
  5. Funds to be transferred simultaneously only after signing by all and completion of CPs

I am a long-term patient investor and not driven by short term exits, however if it’s the need of the incoming investor to clean up the angels from Cap Table I will be reluctantly open to exit.

I prefer not to take exposure in Family and Friends round unless a Micro VC or a lead is engaged 

I avoid exposure through Secondary sale and investing through Platforms. 

This is a living document and will go through changes in the journey of investment 

7th February 2020