If you’ve never angel invested before, the prospect of doing so is surely exciting. You get to hear pitches from passionate founders, learn how different industries are being transformed through technology and innovation, and potentially back the next unicorn.
But angel investing amounts to much more than just this type of work. Many first-time angel investors, in fact, are surprised by the amount of additional administrative and operational work that comes along with it.
To minimize surprises (and headaches), here’s a to-do list of things you will need to take on as you take flight as an angel.
Deal sourcing. You need to find quality founders and startups. Unfortunately, you are just one person. There are only so many events you can attend, conversations you can have, and business cards you can exchange. You can definitely keep your deal flow to the founders you are able to meet on your own, but this is severely limiting: The chances of serendipitously bumping into the next great founder, whether online or offline, is slim.
Many angel investors do take on this uphill battle. They are active on all the latest social media platforms, maintain a calendar full of meetings and events, and squeeze every last contact from their personal and professional network. These leaders are wearing two hats, perhaps unnecessarily: They’re both an angel investor as well as a startup lead generator.
Due diligence. Before signing on the dotted line, you are responsible for conducting due diligence on the startup and its founders. This function takes on greater importance in an era of founders like Elizabeth Homes, who was able to raise over US$700 million dollars for her biotech company, Theranos.
Not every startup will be a Theranos-level disaster, but there may be some red flags or issues it would be worth discovering early into the process. Conducting thorough due diligence requires expertise in several different domains, such as legal, finance, accounting, and more. You’ll either need to hire the necessary talent under the umbrella of an investment company, or work with an agency or firm, which can get expensive.
Legal and regulatory compliance. The various markets in Asia Pacific may be vastly different from one another, but they all generally have one thing in common: They require extensive legal and regulatory compliance from accredited investors. These requirements may be complicated to navigate, especially if you are trying to make an investment into a startup overseas, and the penalties for not following them may be stiff.
The biggest disadvantage of this administrative work is the opportunity cost. Rather than spend time on core investor activities - such as networking with founders, listening to pitches, and negotiating term sheets - you now have to waste hours upon hours of your time directly on paperwork, or coordinating with the talent who will handle it.
Portfolio management. Managing your relationship with a single founding team may be easy, but this function gets exponentially harder as you write more angel cheques. Past a certain number of investments (this will vary from person to person), you cannot just serve as your own liaison. You need to have a dedicated portfolio manager, and more importantly, processes to guide the management of your growing portfolio.
These processes may include everything from reporting (i.e. how often will you require your founders to share updates with you?), strategy (i.e. what mechanisms will be in place for you to mentor your portfolio companies), and even cross-pollination (i.e. how do you empower your investments to help one another where there may be synergies?) These are not easy questions to answer - they require significant time and effort.
A better way forward
While there may be glory in angel investing - you can potentially say you wrote the first check of the next Grab - there is arguably as much downside as there is upside. There are several ways to maximizing the advantages while minimizing the disadvantages, which you can do in collaboration with other top accelerators or venture capital firms in the region, along with us here at Accelerating Asia.
Accelerating Asia invests in startups with scalable technology solutions and revenue generating business models that combine purpose with profit.
In making an investment decision, investors must rely on their own examination of startups and the terms of the investment including the merits and risks involved. Prospective investors should not construe this content as legal, tax, investment, financial or accounting advice.