How to successfully raise Angel Investment for your startup

With the burgeoning startup ecosystem, angel investing is taking off at a scale and velocity that has never been seen before. That said, there continue to be a lot of questions that entrepreneurs at the seed stage of their business have about angel investors. As operating entrepreneurs, we do get sought out often by aspiring entrepreneurs looking to raise their first round of seed capital, and receive mentorship for their journey. Many entrepreneurs have mentioned to me in the past that I should put down thoughts that can help aspiring entrepreneurs raise their first round of capital.

Over the last 9 years, after investing in 120+ startups (several have gone on to become unicorns and soonicorns, while several didn’t work out) through Titan Capital, here are some thoughts that may be helpful for entrepreneurs to understand how seed-stage investors like us think.

Firstly, what is our motivation for making angel investments?

We just want to help entrepreneurs build great businesses. Building a business from scratch in India 13 years ago, one year out of college, was a bit different than what it is now. I recall my co-founder, Rohit and I were introduced to a real-estate businessman in Delhi who was looking to invest behind young companies. After an hour of explaining what we were building, we felt we had completely convinced him. I recall him smiling with satisfaction, and then with a flourish of magnanimity, he offered us INR 5 lacs (US$ 7000) for 60% of the company. Needless to say, we didn’t take him up on the offer.

But a few years later, once we saw some amount of entrepreneurial success of our own, and as entrepreneurs started reaching out to us, we made sure we did whatever we could to help as many entrepreneurs as possible, as long as we believed in them and their vision. In addition to this being a pay it forward, selfishly speaking, staying connected to the top entrepreneurial brains of the country, helps keep ourselves intellectually relevant in the very dynamic market we operate in. We learn a tremendous amount from the entrepreneurs we meet and support, which inspires us with ideas that help us improve our own business.

Everyone finds a sense of purpose outside of their primary professional pursuit in life – some people work on community causes, some pursue artistic avenues, possibly sports for others. For us, given we can only build one business at a time ourselves, being a small part of another entrepreneur’s journey as it gets built out, and enabling their success, gives us immense vicarious joy and satisfaction.

Now, what do we look for?

At the stage we invest, there is often no product - in most occasions, it’s just a PowerPoint and the founders’ vision. The initial 5 minutes are usually a very critical part of the first meeting. This is when the founder(s) tell us about their background, the high-level opportunity, what got them to start the business, why they are well suited to build the business and evidence of forward momentum in the business.

Over the course of rest of the meeting, there are largely 3 areas we would assess: 

• Quality of founding team: We would look for their level of tenacity, numbers orientation, chemistry, storytelling skills, passion for the problem, creativity and hustle. As Josh Kopelman from First Round Capital says quite nicely - the key is to find the cartographers who would create the map, not the navigators who would just follow one. It is important for us to feel that one day not too far in the future, the founders should have the burning desire, vision, charisma and trust from their team, to be able to address with confidence hundreds of employees at a town hall about the good and bad in the business, employees they have been to recruit, retain, focus and inspire. When one meets such an entrepreneur, feeling this energy and chemistry is inescapable and tends to supersede to a great extent nearly any other consideration about the business.
• Size of the market: This is a really tough one to assess at the very early stages. Some ideas that intuitively seem like a large opportunity don’t turn out to be so, and vice-versa. Hence, one tends to use judgment from experience and some back of the envelope assessment to determine whether this is a large enough market. As angel investors, we don’t have the time or bandwidth to do a deep market study to validate these assumptions. Practically speaking, the passion an entrepreneur has for the problem statement, its addressable market size and how pressing the problem is tends to weigh the most on our assessment of the size of the market.
• Unit economics: While there is often insufficient data available at the earliest stages to make an assessment of whether unit economics are positive or not, however, depending on the type of business, it is not that hard to determine whether the margins and variable costs associated with it will create a viable business. For instance, for a direct to consumer business, we would try and understand how net revenue is calculated (taking away discounts, returns, marketplace commissions), what is the orbit of the gross margin profile (eg: 40% for food products and 60-70% for non-food products), fulfilment costs per unit, etc. The decisions that entrepreneurs make for what the margin profile of their business should look like, will define in a fairly lasting manner what kind of business they are building (or as I call it - will it be a squirrel with a tail or an elephant with a trunk). While over time there may be 5-10% margin optimisation with scale and efficiency, generally one doesn’t assume things will change materially in the margin profile of the business, without fundamentally changing the business itself. Understanding the customer's willingness to pay while allowing the company to make positive unit economics is key.

Once we have heard everything the entrepreneur wants to tell us, we discuss internally without any preconceived biases and with the objective of not trying to find faults with the business (given that would be easy to do at the early stage) or trying to talk each other out of investing in the company, but rather together aim to find the incontrovertible truths about the business by thinking through the critical questions. Usually we make our decision post one meeting with the founders and give them a quick answer whether we would look to invest or not at this point.

And, what do founders usually do right/wrong during the pitch meeting?

The entrepreneurs we meet these days rarely do anything wrong at the pitch stage and their level of sophistication has only improved with every passing year. They are the best of the best talent out there, and are extremely well prepared with flawless presentations, MVP product demos and financial projections. There is so much vibrancy in the startup ecosystem and strong informal mentorship that best practices about fundraising spread fast, especially amongst those with high hustle quotient. That said, there is always room to learn and get better.

Based on our experience, outside of what is common knowledge, here are some pointers that could be useful.

• Unit Economics!: The best angels understand that there will be no revenues at the early stages when they are expected to invest. However they do expect the entrepreneurs to have their hands and heads nicely wrapped around the unit economics of the business. This is a critical part of the presentation/discussion that can get missed, and hence it is important to take it head-on and give confidence to the other side that you have the unit economics understanding all stitched up at your end.
• What can this business become: Sometimes as entrepreneurs, we tend to get very deep into a specific focus area - and that is an excellent attribute, and much needed for success. However, it is also important to lay out what a medium/long term business roadmap can look like. Investors need to see that this can go from the nucleus that is being focused on today, to blossoming into something much bigger in the future. Angel investors are usually funding ventures not basis what a business has already done but basis where it is going. 
• Ask good questions: Often at the end of a 45-minute meeting, when we would ask an entrepreneur if they have any questions, we do at times get a blank from the other side. While we don’t see it as a red flag, as fellow entrepreneurs, we see it as a missed opportunity. Think about it. As angel investors, we just had the good fortune of learning about something completely new in such a succinct manner from an incredibly smart person. Why should the entrepreneur miss the moment to pick the angel investors' mind on their initial thoughts about the business, about what assumptions would be most fragile, their experiences with other interesting companies that they may have backed that worked/didn't work, past learnings/mistakes, etc.  

So, what should Founders expect from Angel Investors?

More than capital, the best founders want to surround themselves with good people. As the first investors in the venture, we occupy a different kind of space in the entrepreneur's mind - we don't compete with the VCs as our cheque size is modest and tend to see ourselves as collaborative seed stage investors. We don’t have hard lines drawn on how much ownership we need to have. We are very friendly and easy to work with and usually don't ask for a long list of rights. Entrepreneurs would often ask us that given we are operating entrepreneurs ourselves, and not full-time investors, how much time could we actually give them post-investment. Our response is fairly honest that in fact, we do not have the time to do pre-scheduled recurring meetings, whether monthly or quarterly. We believe we back extremely high intensity and self-motivated founders, whose maturity and resourcefulness is generally well beyond their years. They themselves don’t have the time or the patience to come spend bandwidth with us on a preset cadence. Hence, it works best for both sides that we make ourselves available as per their needs. We don't believe in telling entrepreneurs how to run their company and the best founders know what they want from us and when they want it. Conversely, founders decide to work with us basis our reputation and intellectual/emotional connect. They often do reference calls with existing founders that we have backed before taking capital from us. 

All that said, the few topics that entrepreneurs reach out to us most frequently for are: 

• Helping think through Product Market Fit (PMF) - This is a critical area in the early days of the company and often times entrepreneurs feel that they are covering a lot of distance but there is no displacement. That is usually a sign of lack of PMF. The symptoms of the same are visible in two areas - unit economics and experience. As a rule of thumb, a business cannot have PMF with negative unit economics, defined in the most conservative terms possible with all the fulfilment, direct costs, promotions and marketing netted off from net revenue (not GMV!). Improving experience is a journey, and in the early days is important for the experience to not suck one bit as a starting point, despite all the challenges. Stubbornness with improving quality of product/service is a key attribute of great founders. Do less, but do it really well.
• Team building: One would think that given the number of times startups have been built, the framework of organisation design would be a well-established truism by now. However, the reality is very different. Depending on the type of product/service, stage of market, available capital, competitive dynamic, age and skills of founders, among other factors, every organisation gets built in a fairly bespoke manner. Having seen a few companies get built around us by now, we have a decent barometer for what profiles need to be filled in what order and with what kind of talent. One topic we would often discuss with founders is about the next 5-10 roles they want to hire for. It requires a surprisingly high amount of clarity of thought at the very early stages to know the answer to this question. We’ve seen discussion around this topic brings about a lot of prioritisation in the minds of entrepreneurs about the next few quarters of company building.
• Fundraising: Needless to say, this ends up being the most significant and perpetual area of discussion and healthy debate with entrepreneurs. The capital we provide usually would take a company from 0 to 1 and beyond that institutional capital would need to come in. We also ensure we have the most founder aligned seed-stage documents which set the stage for founder-friendly documentation in the future. Given we have had the good fortune of working with all the leading institutional investors in India across multiple companies, including our own, we have a decent sense for which of the top VC firms (and possibly which partner) would be best suited for which company. We have seen this helps both the VCs and the entrepreneurs to cut to the chase quickly given VCs know that we have a very high bar and hence it is a qualified introduction. Entrepreneurs also understand that we would have introduced them to a VC who in our opinion would be a great partner specifically for them and their business. Which is why we have seen >70% of our investments (outside of the very young, recent investments) raise institutional capital from top-tier firms. Given we are essentially a sourcing pipeline for the top VCs and are in no way competitive to them or their ownership thresholds, it is a very happy and symbiotic relationship that we share with all of them. We would also help companies pair-up with an outsourced CFO in the first year which we have seen helps to raise institutional rounds much faster and with relative ease. Fundraising is an area we have seen entrepreneurs call us for even after they achieved the unicorn status, given that the dynamics of fundraising and cap table management keep evolving with stage and scale. Finally, at the earliest stages of the company, we guide entrepreneurs to plan to raise capital for 18-24 months of runway, and if the company is doing well, the chances of a pre-emptive round to happen within 12 months is high.

In a nutshell, every startup’s situation is bespoke. Every founder's needs are different. We do whatever we are asked to do just as good friends would and try to under-promise and over-deliver :-)

But, what happens when things aren't going well?

Our own entrepreneurial journey, like most entrepreneurial journeys, hasn’t followed a linear path. There have been twists and turns, ups and downs, but whenever we have found ourselves at the bottom of the abyss, somehow we have found the courage to continue and come out of the hole. Knowing how lonely it is for founders at that moment, and the despair they experience in light of widespread naysaying and doubt, we want to be there for them right then, more than any other time when they are building their companies. Powering through troughs takes a lot of intensity and support because it is hard to find the determination and resilience when the situation seems desperate. We want to be there for the tough phone calls because we know we are going to give the entrepreneur non-incentivised advice as a friend would. We are not on the board, not bound by fund life and founders call us because they know no single investment would likely change our fate, which allows them to be super honest. One of the most critical aspects of building a company is getting access to a truth network - people who would give the founder the most honest, candid feedback on whatever topic they need input on.

There are situations where companies don’t work out. As an investor, you lose a lot but the bigger loss is for the founder. They are deeply and emotionally affected and their loss is on many levels. We try and be on their side to make an exponentially tough problem, easier. Empathy with a founder's situation is very important. The founder is all in and has a one-in-one bet vs a portfolio for an investor. There is an EQ side to investing in startups that is vital. Being the safe person for founders to talk to in their most vulnerable stage is profoundly valuable. In cases where companies aren’t able to scale up or run out of capital, we try to connect the founders to other companies in the ecosystem for a soft landing for them, their employees, the business and its customers.

The same way one feels the exhilaration and pride when a company scales up to great heights from the small nucleus when we would have first met/supported the founder, one feels immense agony for the founder when things don’t work out. The good and bad about angel investing is that there is a conclusive finality in due course with respect to the investment decisions one makes, which gives joy or pain, but most of all imbibes humility.

Finally, how do we think about exiting investments? 

Angel investments follow the Power Law and not the Gaussian curve as the stock market. A few investments will deliver outsized outcomes. We think of our investing activities as a business and not a fund. The returns generated from an exit are reinvested behind the next cohort of stellar entrepreneurs. One would want to ensure that there is continuity to this process so that we can help as many entrepreneurs as we can in their respective journeys. Which is why we tend to invest at the earliest stages, mostly by ourselves, taking a very risky bet on what we believe is a passionate entrepreneur and promising business idea.

Our bias is to stay invested as long as we can (we are still invested in 90% of the companies we've backed) unless the company exits completely or reaches a scale of valuation that the proceeds from investment gains can create a game-changing impact to newly minted entrepreneurs’ ambitions. We don’t really have a philosophy around exits, outside of the fact that we should never put ourselves in the position of having to say no to providing capital to an entrepreneur who we believe deserves a solid chance to build the business of their dreams. 

Wrapping up.. 

There is no greater privilege than to get the opportunity to relive the joy of early-stage entrepreneurship through the lens of other founders. For them to make us an intimate part of the early circle of people they trust so completely with every small and significant detail, as they build their companies, is something we are very grateful to them for. It gives us tremendous intellectual stimulation, learning and a sense of belonging to a community of founders that is now 250+ strong. Thank you to all the founders who have given us the opportunity to be their partners for the last many years and we hope to continue the journey of supporting many more great founders in the future as well.