Startup investing & successful exits : few learnings along the way

Lady luck smiled and we generated an exit recently. There are some very important inferences from the experiences and lessons learnt along the journey and I would highlight a couple of them here

* Being disciplined about valuations we offer is critical. - Especially when everyone and their uncle is an angel investor these days

These are heady days when everyone wants to be called an angel investor. A small cheque of Rs10-20 lakhs qualifies you to enter the hallowed precincts of the angel investor club and lo and behold, there you are at any of the weekend gatherings you visit - holding forth on the joys and tribulations of being an angel investor to an engaged and captivated audience eagerly lapping up the war stories of investments and visions of untold of riches which your savvy investment will deliver in your lap. Making a few such investments gets you the adoration of wannabe entrepreneurs who hold you up as a role model, mentor and evangelist whose words are laced with experiences and drip with wisdom. You also attend conferences, mingle with many such other like minded angel investors and of course tweet about the people you meet, not to forget the Facebook posts and Linkedin updates about your encounters. 

It has shocked me umpteen times and shocks me almost daily that many such investors are willing to write cheques without any serious negotiations on rights and valuations.

If you are just one amongst multiple investors and are writing cheques for inconsequential amounts when taken in isolation, and when you are driven by visions of grandeur painted a bit exaggeratedly above, it does become easy for the folks raising capital to downplay your need to get the right mix between rights and valuations. You sign a shareholders agreement prepared by the folks raising money with elementary concerns for your rights and send the cheque over. 

But beware of the follies of ignoring the fear of failure in pursuit of greed of venture backed riches.

A disciplined approach to valuation is critical to compensate for high risk in start ups and the lack of liquidity for your investments. The ability to stand apart from the throngs of investors wanting to own a piece of a hot startup and the willingness to let go of a few good deals  at a rich valuation devoid of any basis of rationality, might save you some money and headaches later in time but, of course, you run the risk of saying no to an Uber or a Facebook that you miss investing in. This is a classic trade off between a portfolio approach to investing where you are building a wide bouquet of portfolio companies in the hope that few of them will strike gold  versus a times consuming, often painful but a careful and calibrated approach towards building a bouquet where in all the flowers shall blossom, some more than others but none shall wilt.

* Successful investing requires serious handholding

It is not enough to invest and hope that your investment will automatically one day grow manifolds in size. Angel investing is a very involved process which has the potential to give you joy, pain, hardships, headaches and anxiety.

You are often investing in entrepreneurs who have the unenviable task of engaging in multiple role plays and performing multiple tasks, and they are unprepared for most of them.

A technology driven nerd who seeks and receives angel money also ends up being an accountant, an investment banker, a lawyer, a visionary, an HR expert, an ace strategist and people manager, a negotiator par excellence, an office admin assistant to a Board room evangelist. When cash flows are tight, he has to keep his chin up and pass on the sense of optimism to his team lest they desert him first off a sinking ship. And of course, he has to beg, borrow or steal but has to generate the required cash on payday to meet the obligations to his team. He has to don the looks of optimism and explain to his team the reasons why others are getting funded at hefty valuations while his company is unable to raise more cash and yet prove to his colleagues that his vision is not flawed and they got to have faith.. ha! and we grudge entrepreneurs their success! 

Any angle investor who can lessen the burden of the entrepreneur and assist on a regular basis in invaluable. Active assistance also helps ensure that the investor gets the confidence vote of the entrepreneur and is able to suggest course corrections and tweaks to the business model to the entrepreneur who is caught up in the daily grind of things that he/she, at times,risks missing the big picture - things so critical and essential to the eventual success of the venture.

This is an excerpt from a much longer communication to recipients of CCube newsletter. Might be of interest to regular readers - so copying it here too. 

Atim