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5 golden rules for first-time angel investors

Madhukar Sinha, Co-founder and General Partner, India Quotient, and Hot 100 2017 jury member, on the fundamentals startup investors should follow. By Satyaki Sarkar

An engineer by training, Madhukar Sinha has had a number of varying job roles during his successful career in the technology industry. He started his career managing investments at the venture capital firm Aavishkaar, and worked with Pradan, an NGO. He then dabbled in social impact investment in various sectors, before he founded India Quotient with Anand Lumia in 2012. Over the last 10 years Madhukar has been an early stage/seed investor, having invested in roughly 50 different startups and provided them with guidance and mentorship. Here he gives key advice to first-time investors.

1. Research the market
“Prior to investing in a brand or company an investor must have a thorough knowledge of the space the company is working in and the market. A product or a team might look very exciting, but without knowing how prospective the space is, how big it is, whether it’s exitable, how competitive it is, etc, it is impossible to know whether investing in that company is a good move. An investor needs to be able to see the future performance potential of that venture and make a decision. Check if there are too many established brands in the space already. Is the idea or business model robust enough to survive and flourish in that space? It is easier to get this information in the B2C sector than in the B2B sector, but prior research is crucial to knowing whether you are making the right decision.”

2. Know the founder’s story
“In a large way, a business venture rides on its founder and his/her drive. An investor should therefore try to get to know the founder’s entire story, his/her background, the thought and impetus behind the venture, etc. This helps the investor know how much the founder is invested in the company, how passionate he/she is about it, and what kind of a relationship can be expected. When the market is in momentum and there’s a fear of missing out, people tend to forget this. They think that since the startup is founded by someone who is an acquaintance or a friend’s acquaintance that the venture must be foolproof. You base this simply on goodwill and trust. However, an investor must not let such factors affect the decision, but rather conduct his/her own research and make an informed decision based on that.”

3. Know exactly why you are investing
“The third most important thing that an investor should do is know exactly why he/she is looking to make an investment in a new venture, just like he needs to know why the company was started by the founder. In a rush to get in on something that seems lucrative, an investor often tends to pour money into a venture simply because everyone else is as well. However, not only does that convey a lack of judgment and awareness, it could turn out to be very detrimental. Someone else could be investing for a completely different reason. Thus, it is crucial that you figure out your own reasons and convictions about the startup before writing the cheque.”

4. Be aware of your limits
“Knowing your limit is crucial not just for first time investors but even veterans. Before you decide to invest your money somewhere, you must make sure that your own personal finances are sorted, all debts are paid, and you have an emergency savings fund in place for any kind of exigent circumstances. After that is done you will know how much you can and should invest. Find out how much the predicted returns on that investment will be. Every investor needs to understand that eventually, in the long run, they make money through their portfolio. So one should never get overwhelmed on seeing a venture that looks very promising, and invest all his/her money in that single company. Instead, make smaller, multiple investments in a number of companies that you have personally selected after the venture has been examined carefully.”

5. Seek help
“Last but not the least, an investor who is just starting out might immensely benefit from taking help from someone who has been doing it for a while and knows how to best go about it, what the possibilities and best practices are, etc. This, however, also depends on the amount of time the investor has available. He/she could either join an angel network, see the deal flow and accordingly do research, and commit only when ready. That is something that needs a considerable amount of time. The second way is when you have money, but lack time. In this case, you can get in touch with a fund, which takes money from HNIs to take care of their portfolios, handle their investments, etc. You have to share some profit with the fund manager, but at least you don’t have to spend your valuable time on it. The third way is if you have a vast amount of funds. In this case you can hire a professional investment adviser directly. If that is the option you want to go with, you would need to have a significant amount of capital, as you need to get an adviser who is a proven expert. And that does not come cheap.” 

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