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 down with prominent angels to hear their stories and strategies and gain unique insights about the early-stage financing space.
Amit Parekh, the VP of Revenue and Fintech at Eureka AI, is a seasoned enterprise leader with a track record of over 20 years in developing high-growth annuity businesses. His domain expertise spans across multiple areas, including banking, credit risk, scoring, payments, fraud management, compliance, and AI/ML Ops.
With a proven ability to scale enterprise B2B SaaS businesses across the US, ANZ, and APAC, Parekh is an active angel investor and trusted advisor to numerous AI, analytics, and fintech startups.
In this edition, Parekh shares his take on angel funding.
Edited excerpts:
How do you typically approach investing during a funding winter?
In terms of investing approach, not much has changed. As an angel investor and advisor, I typically get involved early, at pre-seed or seed stages. Overall, the deals haven’t undergone significant changes.
However, one notable change is that some founders now have more realistic expectations. Compared to the booming days of 2021, I have observed a greater willingness among founders to invest time and listen to feedback. Previously, deals were rushed, with limited interaction and due diligence, and investors often relied on basic criteria such as the space the venture operated in or the founder’s pedigree, along with the names of other potential angels or VCs involved.
Presently, the market reality indicates that later funding rounds, including Series A, are taking longer and happening at a slower pace than anticipated. In my focus on B2B ventures, it has become crucial to achieve revenue, secure good margins, and ensure sustainable and profitable growth before seeking further funding. Therefore, it is vital for the team to have a clear roadmap, sufficient runway, and an execution approach post-seed round to achieve these milestones.
The funding winter has also opened up opportunities for founders to access capital from angels and angel syndicates, resulting in an improved flow and access to funding. Consequently, investors have become more selective, now considering ventures in early stages that demonstrate some revenue, signed proof-of-concept (POC)/pilot programs, or joint development agreements rather than solely relying on a pitch deck.
What are your typical investment criteria?
Most of my investments typically fall within the pre-seed or seed stage, with some extending to the pre-Series A stage. I engage as an advisor and angel investor, either directly or through angel syndicates.
While I have made investments across various domains such as fintech, software/technology, biotech, consumer durables, and e-commerce, I tend to have a bias towards areas where I possess experience and expertise and where I can provide valuable assistance to the team. Specifically, my focus lies in AI/ML platforms, B2B-focused SaaS businesses, and ventures operating in the banking and enterprise verticals.
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My background and passion for credit scoring, wealthtech lending, alternate data, payments, and fraud detection have also led me to invest in and collaborate with innovative ventures in these areas. As a result, there is a noticeable bias in my portfolio towards fintech, AI startups, and enterprise SaaS, driven by both my network’s recommendations and the alignment with the venture’s needs and my capabilities.
Geographically, my initial investments and deal flow were primarily concentrated in Southeast Asia (SEA) and India, but I have since expanded my investments to include ventures across the US, Israel, and the UK in addition to SEA and India. I hold a strong belief in the growth potential of SEA and India, particularly within the sectors I mentioned, which serves as one of my investment criteria.
Participating in and contributing to angel networks and syndicates has been instrumental in broadening my access to opportunities in terms of both domain expertise and geographic reach.
Can you describe your investment process from initial contact to closing a deal?
The investment process varies depending on whether it’s a direct deal or a syndicated investment. For direct deals, where I am taking the lead, the approach is relatively straightforward, often facilitated through a known network introduction.
The initial screening involves conducting quick desktop research, which includes understanding the industry landscape and reviewing any available news, demos, or online videos related to the venture. Additionally, I delve into assessing the key personnel involved, their prior experience, and their involvement with other investors or advisors.
Following the initial screening, a business pitch session or discussion meeting takes place to gain a deeper understanding of the venture, including its product, key personnel, financials, roadmap, and key challenges. The discussion also explores the envisioned trajectory and potential game-changers for the venture.
Subsequently, I validate the market, founder, and venture through my network, which may involve seeking input from fellow investors, advisors, clients, or other industry ecosystem players.
In many cases, specific negotiation of terms is not necessary as the venture may already have existing terms in place with other investors or venture capitalists, typically with standard terms and contracts. The entire process for direct investments usually takes a few days, while syndicated investments may require one to two weeks to complete.
How do you evaluate a startup’s potential for growth and success?
In addition to standard total addressable market (TAM), serviceable obtainable market (SOM), and serviceable available market (SAM) metrics, primary research involves evaluating a realistic TAM and achievable market based on the region or market in which the venture currently operates.
This evaluation takes into account the specific segment the venture is targeting and compares it to industry data, competitors, and public company information. It is essential to focus on sectors that are experiencing growth and have regulatory or industry tailwinds, such as the recent adoption of AI or the emergence of generative AI-based solutions.
Taking a localised example, in Southeast Asia (SEA), there has been significant adoption of digital onboarding in the banking sector in recent years. Startups operating in this space have benefited from this trend. However, it has also led to a rise in identity and application fraud, creating opportunities for ventures focused on identity, fraud detection, and authentication.
It is important to recognize that a startup’s potential is closely tied to the founding team’s experience, expertise, and track record. Building a successful venture requires a team effort, and while solo founders can succeed, scaling can be challenging.
Therefore, it is preferable to have two-three co-founders who bring complementary skills and experiences to the team. This is crucial for navigating challenges and driving growth. When evaluating the team, it is important to assess founder dynamics, clarity of roles, and the ability to work collaboratively across domains and roles during the initial stages of the journey.
How important is the founder’s experience and background when making investment decisions?
Evaluating the founding team is indeed a crucial criterion when assessing an early-stage venture. At the pre-seed/seed stage, there might not be much else to rely on, as product-market fit, financials, GTM metrics, and customer retention metrics may not be fully developed or have a small sample size. Additionally, most startups are likely to pivot from their initial approach or focus area.
When evaluating the founding team, I utilise a model called RATE, which stands for:
- Resilience: Successful founders possess resilience, which is a combination of determination and the ability to overcome challenges and problems along the entrepreneurial journey. Understanding the founders’ connection to the problem or domain they are addressing, their passion to solve it, and their motivation helps gauge their resilience and how they will react when faced with setbacks.
- Adaptability: The founding team’s adaptability is crucial in responding to market changes, shifts in the competitive landscape, and evolving customer preferences. A team that is open-minded, flexible, and willing to listen to new ideas, experiment, test, and learn has a higher chance of success.
- Track record and credibility: Evaluating the founders’ track record, including previous successes or failures, provides insights into their experience and the lessons they have learned. Some of the most successful founders have gone through failures and gained valuable experiences that help them avoid making the same mistakes again.
- Experience and expertise: Beyond their domain knowledge, it is important to understand the founders’ experience and expertise. They may not necessarily come from the same industry, but what matters is their unique insight and approach to the identified problem or gap. Experience in hiring and building a strong team is also paramount.
By assessing the founding team based on these criteria, one can gain a deeper understanding of their potential to drive the venture’s success.
Can you share your successful investment and what made that investment successful?
Most of my investments are focused on pre-seed and seed stages, which means the exit or liquidity events are still a while away.
However, I have had successful exits in some later-stage investments. One example is Taulia, a company that offers working capital management and supply chain financing. Taulia’s success was driven by continuous innovation, leveraging cloud-based platforms, data analytics, and AI models to streamline the supply chain finance process. They had a strong leadership team, industry expertise, customer focus, and impressive financials.
Their strategic partnerships with banks, technology providers, consulting firms, and industry associations contributed to their growth and eventually led to their exit when SAP acquired them as part of their Business Network. Taulia’s strong balance sheet and consistent positive cash flow were notable factors. While I joined this investment at a later stage, I would have loved to be involved earlier.
In a related area, I invested in a venture that provides non-dilutive revenue-based financing for e-commerce businesses. They have experienced rapid growth, achieving returns of four-five times in just a couple of years and reaching unicorn status.
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They benefited from the e-commerce boom during the COVID-19 years, with substantial revenue growth in 2021 and even higher growth in 2022. However, the current macro environment poses challenges, and I continue to closely monitor this space.
On the other hand, it’s important to acknowledge that not all investments go according to plan, despite having the right ingredients and meeting all the criteria. Angel investing is inherently risky, and not all early-stage ventures succeed.
I had an investment in an AI/MLOps player with a distinguished team and a strong pedigree in the data analytics space. They operated in a hot segment providing DevOps tools for data science in the growing AI space, attracting investments from top-name VC firms.
However, they struggled with the burn rate and couldn’t secure the follow-on funding they needed. While they managed a strategic exit, the liquidation preferences meant that those holding ordinary shares didn’t receive any returns.
It’s important to highlight both successful and unsuccessful investment examples to provide a balanced perspective on the outcomes and risks involved in angel investing.
What are some common mistakes that startups make when pitching to angel investors? What are some myths about angel investment?
While angel investments may involve smaller checks compared to VC investments, it is important for founders to maintain their intensity, energy, and professionalism when pitching to angels. Just like with VCs, founders should conduct thorough research on the angel investor’s investment thesis, past investments, and areas of expertise and interest.
Many founders make the mistake of approaching multiple angels or family offices without adequate preparation, relying on a numbers game to secure funding. However, every pitch meeting is crucial, and founders should approach it with the same level of seriousness and preparation as they would with VCs.
Angels, often being professionals or practitioners with experience in the field, can provide valuable advice, feedback, and insights. They can help founders fine-tune their messaging for future VC pitches. Angels are more likely to delve into the details of the market, product/technology, and sales approach, so being well-prepared is essential.
Regarding myths about angel investing, one common misconception from the founders’ perspective is that angels are solely motivated by quick financial returns. While financial returns are indeed an important consideration for angel investors, many angels, including myself, invest for reasons beyond just financial gain.
Angels often enjoy working with innovative ideas, mentoring founders, sharing their experiences, and supporting the startup community. Passion for a specific problem, domain, or technology also drives angel investors. Another myth is that angels should be quicker to decide and more open to all who approach them due to their smaller check sizes.
In reality, many successful angels are highly selective in their investment decisions. They consider not only the capital they are investing but also the value they can bring, the time commitment, and the potential for mutual benefit. Good angels are patient and selective, willing to fold many hands until they find a venture that aligns with their criteria and interests.
From an investing perspective, one myth close to my heart is the belief that angel investing requires a large amount of capital. This is not necessarily true. If you can demonstrate the value you can bring, many founders may be open to accepting smaller checks or finding ways for you to participate in their venture.
Additionally, with syndicate networks, crowd investing, and token sales, it is possible to get started with smaller investments, even as low as US$1,000. I firmly believe that the best way to learn is by doing, and by getting involved in syndicates and angel communities, you can learn from the experiences of others, share insights, and start with smaller capital at risk.
How important is the alignment of values between the investor and the startup founder?
Maintaining alignment of values is a critical factor and something to assess prior to making an investment. When values are aligned, it facilitates a working relationship with reduced conflict, a shared sense of purpose and passion for the desired outcomes, and increased trust and open communication. This alignment also ensures that the advice and strategic input provided by the angel investor are in line with the business and more likely to be acted upon.
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How do you manage risk when investing in startups? Are there any specific metrics or indicators you look for?
First and foremost, it’s important to acknowledge that perception and risk appetite can vary based on individual factors such as portfolio size, personality, and timelines. With that disclaimer in mind, managing risk in this asset category follows similar advice to general investing principles.
Firstly, it’s crucial to educate yourself and understand how angel investing works. Familiarise yourself with basic valuation and financial analysis techniques, create an investment thesis and criteria, and stick to them. Diversification is key, both geographically and across different domains, stages of investment, and industry segments/sectors. Angel investing, like any early-stage venture investing, involves a degree of a numbers game.
Making multiple investments increases your chances of achieving a decent return, even with a relatively low success rate. At the seed stage, only about 1 in 10 companies make it to Series A, and the number drops even further to 1 in 100 for the pre-seed stage. If a startup manages to raise a Series A, only around 20 per cent survive to an exit.
Based on your desired return and assuming a 10 times return on successful investments, you can determine the number of investments required and the capital allocation for each. Maintaining consistency in deployment can help avoid excessive losses, and doubling down on successful ventures by participating in their follow-on rounds can be beneficial. This approach provides more insights and data on the business compared to investing in new ventures.
While there are numerous metrics to consider, they encompass financial metrics such as burn rate and capital efficiency, market-related metrics, operational metrics, and sales metrics like customer acquisition cost (CAC), customer lifetime value (LTV), and time to break even on a customer.
In addition to metrics, honesty and integrity in representations are crucial. Conduct basic due diligence to ensure the accuracy of information provided by the startup. Instances of misrepresentation, such as false claims about existing investors or firm interests, can be avoided through thorough investigation.
To reiterate, it’s important to understand that the guideline numbers I mentioned are examples, and relying solely on averages can be misleading. Individual outcomes can deviate significantly. Angel investing carries risks, including the possibility of losing some or all of your capital. Therefore, only invest an amount that you are comfortable losing and still able to maintain peace of mind. As a personal example, I allocate five per cent of my overall portfolio to angel investing.
Can you share any advice for startups looking to raise funds from angel investors?
Maintaining a professional and engaged relationship with your angels is crucial even after the investment. It’s important to treat them as valuable partners and leverage their expertise and network for strategic advice, introductions, and support.
One of the best practices I’ve observed is founders providing regular updates to their angel investors. These updates can be in the form of monthly or quarterly summaries that highlight the progress of the business, challenges being faced, and any specific areas where assistance or support may be needed. These updates can be shared via email or a document, keeping the angels informed and engaged in the journey of the startup.
Unfortunately, some founders tend to become less communicative once the investment is secured. This can lead to a loss of potential benefits from the angel investors’ knowledge and network. By maintaining regular and transparent communication, founders can foster a stronger relationship with their angels and continue to benefit from their insights and support throughout the growth of the business.
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