Investor / Mentor Journey Into The Start-up Ecosystem – Some Observations

Background

After having had a career of nearly two and a half decades providing Consulting led Solutions and Services to Global Banks and the Financial Services Industry, owing to certain personal setbacks in life, I moved away from professional life.

After being part of some soulful engagements in social and community work, and some educational pursuits, I wanted to once again engage with some professional activity.

For most of my career, acting as an intrapreneur and having been part of creation of some innovative industry pioneering financial solutions, I thought that by engaging with start-ups both as an investor as well as a mentor, would provide me with the required level of professional satisfaction, as also, allow me to engage selectively and on my own time.

Objective

Given that the Indian start-up ecosystem is growing rapidly, where literally thousands of new start-ups are coming up every year, it is my belief, that the larger society has a moral obligation to participate within this ecosystem, both by way of financing these start-ups and / or guiding them appropriately. Thus, hopefully they can become one of the main engines of innovation and growth for the economy.

Owing to wide industry experiences, it was my intention to bridge the “experience” gap existing within start-ups i.e. apart from direct investments, also act as a mentor and advisor by sharing the knowledge and experiences and distribute it amongst the wider start-up community.

One of my objectives was to also provide a “guardian” type approach to the start-ups. Start-up life can be very difficult and challenging, and hence a positive mental and physical environment is very important, particularly in the initial years. Personally, having faced various setbacks and having understood life from an alternate perspective, and having shared those with the larger community, I thought such learnings could also be useful to the founders.

While I did not have a specific investment thesis, I tried to focus on those start-ups which looked to create a market differentiation by introducing concepts which add value to human lives and their well-being. Hence it was a sector-agnostic approach, and was all about the founder and the team, the value of the product and service and the target market segment. Though I did prefer and participated in sectors such as People Intelligence, Mobile Technology, AgriTech, Arts, Training, Healthcare and Space Technology.

With these objectives I set out on this journey sometime in late 2017, so am a relatively new Investor and Mentor within the ecosystem. Yet, I had the opportunity to invest in over 15 start-ups; plus, some more via the Private Equity route. I also informally mentored a few start-ups and some other founders. So, my learnings and experiences have primarily been gathered over this short period and is very specific to India.

Observations / Learnings / Recommendations

Below are some observations and learnings of my journey. I would like to state these are my personal experiences and opinions and should not be construed as a reflection of the entire ecosystem, and by no means, are an indication of any specific start-up and its founder.

But I believed it was yet important for me to publish, particularly for the new entrants (investors and mentors) into this ecosystem, who are likely to be manifold in the decade of 2020s. Especially since more and more investors are investing passively via multiple online and non-direct channels, as I did for most of my investments.

1) Excellent learning in terms of different domains and across a variety of sectors. Having been insulated all my professional life in the Financial Services domain, it was educational, refreshing and to some extent therapeutic to garner knowledge in a lot of other areas.

2) Good learning also from other investors in the ecosystem who come from different domains and backgrounds, and bring with them a lot of other experiences, which otherwise one could not have gained.

3) Very bright minds of the founders. Extremely creative in terms of their thinking and thought process, as well as envisioning what might be attractive in the future. There were exceptions as well, but fortunately not many.

4) Entrepreneurial spirit of the young founders and their risk-taking abilities are very admirable. In part, this is obviously due to the cushion available because of the fast maturing Venture Capital (VC) and Private Equity (PE) market, as also the emergence of Angel Investors in India. This has a downside as well, in terms of the VC and PE firms taking undue risks by backing founders and ideas which do not hold merit.

5) Angel investing is fraught with risks and is ideally only for individuals with very deep pockets. Statistics suggest that investments between only 20% and 30% of one’s total portfolio are likely to generate any returns. In my relatively short journey, initial indications suggest this to be true. I recommend that any investor participating in the ecosystem should not just expect to look for winning start-ups, but invest for failure, rather than success, and thus avoid disappointments. Most investors will never be part of a Unicorn!

6) Hence, I believe the government should partially regulate this market like in the USA where a minimum of one million US dollars of net worth (excluding one’s own home) is required to be accredited as an Angel Investor. This is necessary as most investors really do not have the maturity yet; hence in my opinion a minimum net worth of ? 5 crores (excluding one’s own home) should be stipulated for qualification as an Angel Investor. The current stipulation is very low. There could be exceptions viz. for family members investing in the start-up of the founders thus providing them with the initial seed capital to kick start the venture.  Like in regulated Capital Markets, there are also no specific regulations to protect the rights of Angel Investors; or any incentives like similar tax treatment or breaks as available in the capital markets, all of which should be considered.

7) An investor should be prepared for a long-term investment horizon of 7 years and above, While there could be exceptions in terms of early exits, those will be rare. This is something I was aware of before I started the journey and had always intended to deploy “patient capital”, where founders were looking to create a “good”, “stable” and a “compliant” business, and which had the potential of being “sustained” over the longer term.

8) It is strongly recommended to socialise and invest a lot of time amongst various angel networks, forums and conferences to enhance the knowledge and to increase the possibility of sighting good opportunities. Do not stick to just one network or group. Also spend enough time learning about the approach towards Angel Investing viz Evaluation Criteria, Due Diligence, Valuations, Documentation, Lead Investing, etc.  

9) Please avoid the herd mentality, and one should not invest unless one is comfortable. The reason being that many start-ups are often backed and mentored by leading investors and other such people in the industry, and yet can, and do fail.

10) While it may not be always possible, especially when one is investing passively or remotely, it is recommended to have an in-person meeting or two with the founder(s) prior to investing. This will allow the investor to gather a more personal perspective of the founder, as also allow the founder to know more about the investor.

11) Most founders are not interested in any value add an investor can bring in terms of their experience. For most of the founders, the only interest in an Angel Investor is the size of cheque which the investor can write and with a minimum or preferably no dialogue; and, the duration within which that cheque can be provided. This was particularly true of many of the young or first-time founders.

12) Unless the start-up is associated with any forum / group which has also provided / arranged to provide funding, and thus could “morally” influence the founders, most founders are not interested in being mentored; some even consider it to be meddling. To me it appeared, that founders are just happy at not being bugged at all after the funding is provided. The only time they proactively reach out to the investors is when they run out of money and need more money. Or when the founder starts another venture or provides reference to another founder, but that too is only for money.

13) One completely understands and appreciates that the start-up life is extremely challenging and dynamic, and that the founders are under a mountain of pressure. But most investors with their rich experiences of the domain, business/strategy, technology, operational and financial background can contribute in many ways in helping the founders, but it is just not solicited. The only help solicited is around network to increase sales and garner further investments. While on my part I too could have been more proactive in reaching out to the founders, I always believed that they were not too “enthused” at receiving any coaching / guidance. However, this was not true of the older founders or in cases where the founders who had previously created other ventures.

14) I believe that it is in the best interests of the early stage start-ups and its young founders to pro-actively engage and share the organisational aspects with the investors; more often than is the practice. Such interactions will allow the founders to tap and leverage upon the experiences of the investors, and it is possible that something very useful could emerge out of such interactions. Founders should not have cause of any unfounded worries about being perceived as “weak” in asking for help, as it is as much in the interest of the investors, as it is to the founders. Also, many investors are genuinely interested in mentoring and offering a helping hand to the founders, not just financially and professionally, but even otherwise from a “softer” perspective; and I believe that a good friendly discussion always leads to a positive outcome.

15) Finally, the communication channels which currently exists between the founders and the investors leave a lot of scope for improvement in terms of its effectiveness and being more responsive to messages and emails; and is applicable to both the founders and the investors.

As I continue to move ahead with my journey, I do sincerely hope that there is increased participation from the larger society in this eco-system, and that there is greater collaboration between Founders and Investors / Mentors, than which perhaps exists today (well at least from my own experiences.)

I wish all the participants of the Start-up Ecosystem the very best, as am very hopeful that this engine will contribute even more significantly to the Indian economy in the coming decade.

I welcome and appreciate your viewpoints on this subject.

Thank you.

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