Angel Investing Masterclass
In the last article, we covered ‘How do successful angel investors allocate assets?’ & ‘How Much Investment to Allocate?’ First Year of Investing: In his first year, Lokesh invested ₹25,00,000 in 5 companies: Lokesh also reserved ₹25,00,000 for potential follow-on investments, aligning with the advice to match initial investments with reserved capital. This preparation ensured he could support the startups through subsequent funding rounds. Subsequent Years of Investing: This totaled ₹50 Lakhs, but Lokesh typically found himself investing an additional ₹2 Lakhs in each of the 5 new companies from the first year, adding another ₹10 Lakhs. Consequently, Lokesh’s investment grew to ₹60 Lakhs by his second year. Alternative Strategies: However, not all investors follow Lokesh’s method. Some opt out of follow-on investing, significantly reducing their annual capital commitments. Without follow-on rounds, the investment is halved: Another crucial piece of advice Shubham received was to start with smaller investments. At Launchpad, Rajesh recommended he begin with investments around the ₹25,00,000 level. This approach allows new angels to gain experience without overcommitting their resources.
In this article, we’ll be covering ‘What advice would you give a new angel just starting?’ and more importantly ‘How much capital they should expect to invest on an annual basis?’
For new angel investors, receiving tailored advice is crucial to navigating the high-risk, high-reward landscape of early-stage investing. Experienced investors emphasize making new investments annually to maintain a sustainable pace. This strategy helps avoid overexposure and potential buyer’s remorse, fostering a deeper understanding and increasing the likelihood of successful investments over time.
As always we’ll try to explain this concept with the help of a story. Let’s begin!
Shubham was a newcomer to the world of angel investing. With a background in tech and a passion for innovation, Shubham was eager to dive in but wisely sought advice from seasoned investors. This story chronicles his initial steps and the valuable guidance he receives along the way.
When Shubham first considered angel investing, he was advised to start slow and steady. A seasoned investor Rajesh at Launchpad suggested that a portfolio of 25 investments is the minimum, but aiming for 50 would be better for diversification. He also recommended making 5 to 6 new investments per year to maintain a sustainable pace.
According to Rajesh, "At the low end, you should aim for at least 25 investments, and 50 is even better," he told Shubham. "Pacing yourself with 5 to 6 new investments per year is a good strategy."
Taking this advice to heart, Shubham made his first few investments cautiously. he chose startups that aligned with his expertise in tech and innovation, spreading his capital across multiple deals. This strategy helped him learn the ropes without risking too much of his capital upfront.
By making smaller investments, Shubham could participate in more deals, gaining a broader perspective on different startups and their growth potential. This hands-on experience was invaluable in building his confidence and understanding of the angel investing landscape.
As Shubham progressed, he continued to seek advice from Rajesh and adjust his strategy accordingly. He learned the importance of thorough due diligence, networking with other investors, and staying informed about industry trends. Each investment taught him something new, and his portfolio began to grow steadily.
One day, while interacting with a few budding investors, Shubham was asked a question by his buddy Rahul - How much capital they should expect to invest on an annual basis?
Shubham was a little perplexed by this question. He asked Rahul to accompany him to meet Rajesh. Rajesh while answering the question narrated an incident where he had explained the very same concept to another investor Lokesh. “Lokesh began his investment journey with a plan to invest in three new companies per year, allocating $10,000 to each. Rajesh advised Lokesh to reserve a dollar for every dollar invested in the first round. This meant setting aside additional funds to support follow-on investments, crucial for startups needing further capital within the first 18 months.
In the second year and beyond, Lokesh continued his strategy, but his annual capital commitments increased:
Scaling Up Investments:
Lokesh considered increasing his investments to ₹10 Lakhs per company. Here’s how the numbers worked out:
Rajesh advised him "Getting your feet wet is better by doing more deals and smaller investments, I always get upset when an investor writes a ₹1 crore check for their first investment. It’s better to avoid setting yourself up for an unsustainable pace and potential buyer’s remorse."
By maintaining a measured pace and diversifying their investments, Shubham & Lokesh mitigated risks and maximized their learning opportunities. They also built a network of fellow investors and mentors, which proved to be an invaluable resource for advice and support to other budding investors.