Amidst the challenges of a tough funding climate, e27 is launching an exciting new article series called Angel’s Advocate to provide fresh perspectives on angel funding. In this exclusive series, we sit with prominent angels to hear their stories and strategies and gain unique insights about early-stage financing.
Sanjay Shivkumar started his first company while serving in the army and got into the tech space through a grant from Spring Singapore in 2010, building mobile apps for MNCs. In 2016, he joined Carousell through an acquisition and has since been active in angel investing in startups to give back, as others have done for him during his entrepreneurial journey.
In this edition, Shivkumar shares his take on angel funding.
Edited excerpts:
How do you typically approach investing during a funding winter?
First, I try to assess whether a startup has the potential to raise enough funding or generate enough gross profits to sustain its operations for a significant period, typically 18-24 months. This is important because during a funding winter, it becomes more challenging for startups to secure funding, and I want to ensure they have a sufficient runway.
I also evaluate the startup’s business model. Companies that heavily prioritise growth without demonstrating early signs of monetisation may struggle to attract investors during a funding winter. I try to look for startups that have a clear path to monetisation or those that have proven to have already the ability to generate revenue.
The good thing for us is that I also feel that a funding winter helps angel investors open up the opportunities into a more potential deal flow where companies are now willing to take on more angel investors as the professionals/VCs become more selective and at a more realistic valuation.
What are your typical investment criteria, such as industry, stage, and geographic location?
It has evolved.
Initially, I primarily invested in companies raising their first angel round, targeting very early-stage startups. However, I have since shifted my focus to companies in the seed or pre-Series A stages. My approach was to reduce some risk as these companies tend to have more data points. And as previously mentioned, the seed and pre-series A companies are now more willing to let smaller angel investors come on board.
When it comes to industry preference, I prioritise companies operating in industries where I possess either some sort of domain knowledge, a genuine interest or companies which I feel are giving back to society in one way or another. By investing in familiar verticals, I hope I can better understand the broad strategy the company is taking.
Regarding geographic location, I prefer looking at the Asian markets, but the deal flow remains an obstacle to small-time investors like us, and thus I find myself investing mainly in Singapore-based startups. I believe that the next phase of significant growth or consolidation will likely emerge from this region, and we have several SG-based startups who have proven that they can scale to the region successfully.
Also Read: Good angels patiently fold many hands to find the perfect venture: Amit Parekh of Eureka AI
Can you describe your investment process from initial contact to closing a deal?
As an angel investor not engaged in investing full-time, my investment process typically involves relying on my networks or contacts who provide deal flows. A deal from an experienced investor is always preferred, and I’ve gotten into a few good companies through such introductions.
I normally meet the founders for a casual coffee chat to pitch their business and, more importantly, get to know them as a person. I would also do simple due diligence checks online, leveraging publicly available data. For example, B2C companies usually share their traffic in their pitch. I take note of those and use tools like Similarweb just to validate the rough numbers to see if it’s way off.
As a small ticket investor from a founder background, I understand the challenges and constraints faced by startups, so I try not to burden founders with excessive demands for information or an extensive list of questions.
For angel investors, we mainly struggle with access to deal flows. Unless you have plenty of time, I highly recommend angels to invest in funds (I participated in Orvel), where it will be much easier to get access to better deals and have more support than when an individual is investing alone in his/her personal capacity.
How do you evaluate a startup’s potential for growth and success?
I tend to focus on the founding team. I prefer teams with previous experience in starting companies, even if their previous ventures were unsuccessful. The knowledge gained from building something from the ground up can significantly contribute to their ability to navigate challenges and make better decisions.
This experience adds depth and resilience to the team, increasing the likelihood of success in their current venture. The key characteristic I am looking for is grit because I firmly believe it is teaming with grit that can go the distance, and we all know that running a business is a lifetime endeavour.
Secondly, I try to assess the industry in which the startup operates. While a strong team is essential, being in the right industry can greatly influence a startup’s growth potential. Additionally, I look for industries where consolidation is likely to occur, as this presents opportunities for startups to position themselves for growth and exit opportunities.
How important is the Founder’s experience and background when making investment decisions?
The founder’s experience and background are crucial to my investment decisions. I consider their experience building a business from scratch the most important factor. Starting a venture is a challenging endeavour, and firsthand experience navigating the complexities of running a business is invaluable.
When assessing founders, I specifically look for indications of grit and resilience. I look at their track record to understand the duration of their previous roles or startups. This information provides insights into their ability to persevere and sustain their commitment over the long term. I try to find Founders who demonstrate the determination and endurance required to run an entrepreneurial marathon.
Can you share your successful investment and what made that investment successful?
The best investment I’ve made for myself and my team is choosing the path of being a founder, going through the ups and downs (usually more downs, but those few ups will keep you happy) of an entrepreneurial journey and meeting good people who turned out to be great friends in my life.
In terms of angel investing, the most important aspect for me that has made some of my investments successful would be the quality of deals/companies I can access. By the way, I also have lost or will lose money on some of the investments I’ve made so far, so it is not like every investment will generate a return, and this is an important point for people looking to angel invest.
What are some common mistakes that startups make when pitching to angel investors?
I obviously cannot speak for all angel investors, but one common mistake I often encounter is an excessive focus on the product or technology. While the product and technology are important, allocating too much of the pitch, say 80 per cent or more, solely to these technical details can be overwhelming. Unless the startup operates in deep tech/science and is pitching to a specialised audience like scientists, this approach might not resonate with layman investors like us.
Instead, what I personally look for in a pitch is a clear articulation of the problem the startup aims to solve. I want to understand the significance and size of the problem and how the startup intends to address it directionally.
Also Read: It is important that founders see investors as their partners: Christina Teo of she1K
Another thing I try to look at is the founder’s motivation in starting the business. Did he personally face the problem, or was it more of identifying a gap in the marketplace? From my experience, Founders building products to solve their problems tend to be more innovative.
What are some myths about angel investment?
Myth: We are in it for high-risk, high-reward investments.
Fact: While we do have to take on more risk, and the bottom line is to be comfortable with losing our money, we do try to reduce that risk, and at the end of the day, I believe the biggest risk is putting your cash idle in a bank. In Singapore, we love putting our money into the property market, but I hope to see more of us angel investing as an alternative.
Myth: Angel investing is exclusively for tech startups.
Fact: While technology startups often attract angel investment, it is not solely for technology startups. People can be angel investors in traditional SMEs as well. SMEs power the economy of any country, and to me, technology startups are simply SMEs with the Internet as a platform.
Myth: Only wealthy individuals can be angel investors.
Fact: While some angel investors are high-net-worth individuals, many individuals could be mid-level managers or retirees seeking to leverage their experience or just contribute back in their own way.
How important is the alignment of values between the investor and the startup Founder?
The alignment of values between the investor and the startup Founder really depends. Some investors, like myself, adopt a hands-off approach, while others prefer a more hands-on role. Although I would also say most angels should play a more hands-off role.
Personally, as a hands-off investor, I still consider the alignment of values to be significant. I hesitate to invest in founders whose general life perspectives differ greatly from mine, although I cannot always find that out.
How do you manage risk when investing in startups? Are there any specific metrics or indicators you look for?
When managing risk while investing in startups, I always try to consider whether the startup is already generating revenue.
Startups that have already achieved revenue generation demonstrate some market validation and their ability to monetise their products or services as a critical skill set. This reduces the risk associated with startups solely reliant on funding without a clear path to revenue generation or simply pushing the hard work of monetisation down the line. Their revenue growth rate also provides initial insights into the scalability and sustainability of the business model and team.
Also Read: Do not treat the pitching process as a transaction, angels are not ATMs: Yi Ming Kau of Krux Asia
Can you share any advice for startups looking to raise funds from angel investors?
Hustle and build relationships: Continuously work on building relationships and expanding your network. Building strong relationships with investors and other founders can open doors to funding opportunities. Other founders can also really become good friends because they can be strong emotional support pillars, having gone through the same struggles that others might not understand.
Be clear about your ask: Clearly articulate your funding requirements and how the investment will be utilised. Be specific about the amount you seek and the milestones it will help you achieve. We will appreciate transparency and a well-defined ask.
Set realistic valuations: Avoid setting excessively high valuations, especially if your startup is not already generating significant revenues with high growth rates. Be realistic and align your valuation with market standards and your current growth stage. Coming from a founder background, I feel it is better to undervalue yourself in the first two rounds before you start to catch up to the valuations. The pressures of having your business metrics catch up to high valuations might not be worth it.
Focus on building your business: This is the most important advice. While raising funds is important, remember to prioritise building and scaling your business. Investors are attracted to startups demonstrating progress, strong execution, and tangible results. Spend significant time and effort on product development, customer acquisition, and building a solid foundation for growth.
Some founders focus too much on fund-raising and listening to investors too much. While ironic for me as an angel investor, I always tell the Founders to look after themselves and their teams first and foremost, and not the investor first.
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