Mastering Angel Investing: Identifying Winners and Making a Difference

Angel Investing is a huge responsibility. No, it’s not just your money on the line but the success of a raw idea and the aspirations of an entrepreneur that are on the line as well. As an angel investor, you have front-row seats as the next big disruptor takes shape or another business idea fails to take off. So, how do you spot the disruptors from the failures? How do you predict the success of an early-stage company? How do you get to the level of seasoned and successful investors where you can identify the winners and grow your portfolio?

Don’t worry, we got you. In this blog, we will explore the essential qualities of a successful investment strategy. Drawing from the expert insights from Praveen K. Varshney, FCPA, FCA , let’s discover how to identify high-potential ventures, navigate risks, and stand out as a strategic investor in the world of startups.

Why Angel Invest?

Before we dive into the factors that help you become a successful investor, let us take a step back and introspect about why you should angel invest. You can invest in a capital fund and see your money grow, or become a Fractional C-Suite team member and guide entrepreneurs with decent experience to the success they deserve. But why become an angel investor?

The reasons vary from?person to person, but you can sum them up in four common reasons:

Supporting Innovation From the Ground Up

Entrepreneurs in early-stage companies have a lot on their plate – working on the business idea, structuring the team, pitching in events for fundraising, it’s a never-ending job. Without proper guidance, entrepreneurs may mess up the business, which is why they need an experienced figure by their side.

Peter Thiel, co-founder of PayPal, was an early investor in Mark Zuckerberg-led Facebook in 2004. Thiel made a pivotal decision to invest $500,000 in the nascent social media platform, acquiring a 10.2% stake. This investment helped Facebook secure crucial early funding and provided the company with valuable strategic guidance from Thiel's extensive experience in technology and entrepreneurship.

As an angel investor it’s your responsibility to be the helping hand of ambitious leaders, in addition to providing them financial support. The right angel and entrepreneur duo will be able to solve problems quickly, scale the business, create jobs, manage taxes, and generate wealth for all stakeholders.

Mentoring Future Leaders

According to Harvard Business School, 55% of angel investors were previously the founder or CEO of their startup. So, more than half of the world’s angel investors extend their hand to budding entrepreneurs who have just begun their startup journey. But why so? Because they realize there is a lot to learn for entrepreneurs on an individual level to prepare for the impending pressure of performance.

Praveen was once introduced to two female entrepreneurs?who were?building a global floral brand. He got a strong indication that these women had the spark to succeed and was ready to help them. He mentored them for a year, advising them on?managing expectations and the mindset needed to build a profitable venture. From its beginnings in early 2016, the company has participated in numerous events and generated significant revenue.

Investing in?early-stage companies allows you to “give back” to the investor ecosystem by nurturing the entrepreneurs and the organization (two separate entities). A good relationship with the leaders will also help you build connections and draw good returns, which brings up the third factor.

Higher Returns On The Invested Capital

Praveen got some founder stock in return for his guidance on top of the initial check-in with the floral brand. He had also invested in a local projector company, which generated excellent returns after two years of support. And that is how typical angel investors make money – you find a promising organization, invest capital, guide the leaders, set up the company for specific goals, and then exit at the right time.

According to a 2007 study by Robert Wiltbank and Warren Boeker, the average return on angel investments was 2.6 times the initial investment over 3.5 years, translating to an internal rate of return (IRR) of 27%. Clearly, the invested energy and faith of angel investors reap handsome returns.

Passion for a Specific Industry or Cause

Passion is the common denominator in every success story. Passion is the common denominator in every success story, even in investments. Varshney Capital initially invested in a promising solar company that later became the largest in Canada. Around the same time, Praveen’s children, Jaiya and Aneesh, were born, which inspired him to explore impact investing. Fast forward a few decades and Jaiya’s interest in fashion and sustainability helped her launch a textile company that uses organic waste and seawater to make eco-friendly clothing. On the other hand, Aneesh’s aptitude for music led him to build a platform for musicians to engage with their fans, raising $100,000 when he was only 21.

You can also tap into your areas of interest and offer your knowledge to budding entrepreneurs. As your involvement grows, you’ll become more invested in the venture, leading to greater care and contributing to the company’s success over time.

The Four Key Ingredients for Angel Investing Success

Now that you know your motivation, it is time to talk about the building blocks of a successful investment:

An Idea That Fulfils an Important Need

Idea is the focal point of all businesses. But not just any idea, one that solves a real need, pain, or something nice to have. The world thrives on both breakthroughs and services that make life easier. Facebook was a groundbreaking idea in the early 2000s, while Twitter and Instagram evolved into more convenient social media platforms over time. All three, however, have proven to be highly profitable.

The idea must have growth prospects and scalability potential, and the entrepreneur needs to expand that idea into a proper business plan by preparing a revenue model, Intellectual Property, and competition analysis. How do you judge the idea of a company? By listening to the pitch, of course. The entrepreneur must pitch the idea in such a way that highlights its value proposition and positions it as the next big thing. Feel free to connect with the investor and ask them further about the idea and the ultimate goal. At the end of the day, you are betting on the idea’s feasibility, or you may have to pivot.

The Perfect Timing - Not Too Early, Not Too Late

Xerox Alto, developed in 1973, was the first computer with a graphical user interface and mouse but was never commercialized. Its concepts were later popularized by Apple and Microsoft. Google Plus was introduced in 2011 and failed to gain traction as most of the?population had migrated to Facebook or MySpace.

The moral of these stories is that a business idea has to develop at the right time. As there is no perfect system to decide the right time, as an angel investor, you can guide entrepreneurs in shaping their ideas to fit what the market understands today. Take Android, for example. In the beginning, it faced tough competition from Apple and Blackberry. To capture the smartphone market, they first tied up with phone manufacturers who would ship their software so a large chunk of the population could grow accustomed to Android, and slowly, the idea became a revolution. So, look for good ideas, and let them take their time.

Raising and Using The Capital

The next thing you must assess about companies is how they raise and manage their capital. Of course, there are many ways to fundraise, such as?grants, debt, SAFEs, common equity, preferred stocks, etc. However, the cap table will highlight the strategic decisions of the entrepreneur in granting particular investors a type of ownership. Entrepreneurs should not hand out equity like it’s candy, as possession in 9/10th of the law. Not all investors need SAFEs or convertible notes, and this decision-making reveals how smartly the entrepreneur thinks.

When it comes to managing finances, the company must have a clear plan of how much revenue they plan on making, how they will make it, the capital needed, and the return on investment. A clear message about what will happen with your investments will instill trust in the company. You’ll find yourself thinking, “If they are doing so well with what they have, let’s see what they do with more capital.”

A Winning Team

Praveen has found that an inexperienced team will ultimately fail even with minimal competition and a fantastic product. You have better odds of success with an experienced team who knows the dynamics of the business world, how it changes, when the right time comes, and how to ship the product to the audience. If entrepreneurs lack certain chops to make it big, you can always set up the right people around them to build them for the future. But above all, the team must have the right vision and passion to succeed; without these two, the business is futile.

Any organization with the above factors will be a good investment opportunity, as it has the foundation to achieve its goals. Note down the points in a cheat sheet and refer to them whenever you hear a pitch or talk to an entrepreneur.

About the Speaker

Praveen K. Varshney, FCPA, FCA is a seasoned angel investor and entrepreneur with over three decades of experience in finance and venture capital. As a founding partner of Varshney Capital, he supports innovative startups across industries, guiding them to growth and success with strategic insights, capital, and a passion for impactful investments.

Watch his full keynote here .