A commitment to long-term partnerships
Investing in early-stage companies can be highly risky and equally rewarding. I recently began investing in startups as well and even shared the philosophy of how entrepreneur’s should pay it forward in this article. Despite being fairly new to the startup-investing world, I have spent considerable time learning about the same, by putting my money where my mouth is. I have now made well over 30 investments and even seen some of my portfolio companies raise follow on financing rounds at high multiples, within just months of embracing angel investing.
With a preference for investing in companies in their concept/seed stage, I am seeking the best companies and management teams poised for exceptional growth and leadership position.
Stage of investment
A proven partner to exciting and innovative entrepreneurs, I typically write my first checks at the Seed round.
Number of investments
Startup fundraising efforts from private investors can be at either of the following four stages:
- Concept stage – The money that flows into a startup, when it is just an idea. Most investments at this stage are made based on just a pitch deck or a landing page. Given the execution risks, no product, no proof of concept, no customers and no revenues, this is the riskiest stage to invest. Yet it also has the potential to reap the highest rewards. Getting access to such deal flow is purely a function of your network and how well connected you are. Even crowdfunding platforms do not entertain startups at this stage, because it is very challenging to create a story around growth prospects without any execution. The biggest beneficiaries of startups at this stage are startup incubators, who provide the startups with about $25,000 in funding in exchange for mentorship, office space and access to investors. The startups in turn part away with about 6% equity that the incubator receives. Capital at this stage is used to build a product so the startup may be able to provide product demos and acquire users/customers. Typical valuations seen at the concept stage vary from $250K to $5M, depending on a number of factors such as team’s past experience, industry knowledge, opportunity size, etc.
- Seed stage – Capital that flows into a startup when it has a prototype ready, but limited to no traction. Most startups that graduate from incubators and accelerators are now ready with a product and have decent traction to back their product-market fit. They seek to raise capital for purposes of hiring, product expansion, and customer acquisition. Successful demo days will have gotten the startup the exposure it deserves.
- Growth capital – Capital raised to keep up with demand, to scale operations, expand the team and make acquisitions for growth. This is the phase in a startup’s lifecycle when it has the potential to run away with its valuation, of course on being merited by traction. Series A, B and C type rounds are all part of raising growth capital. Many startups themselves get acquired when in this phase, as they have demonstrated a stable business model that can scale. Companies that reach this phase in their evolution cycle have overcome the execution risks.
- Pre-IPO liquidity capital – This isn’t necessarily capital raised by the company. It is often employees with stock options and sweat equity who may want to cash out partially/completely prior to an expected major liquidity event in the next 12-18 months, such as an IPO. There could be a number of reasons for this, which are mostly never disclosed, but investors then get the option to buy in at the last priced round valuation, which typically is at least a 20% discount to the current valuation estimates.
What I look for
I look for credible teams executing against incredible ideas. While my investment decisions are based on many factors, I tend to focus on three main criteria when evaluating a new opportunity:
- Team - Market-defining companies are founded by exceptional teams with the relentless spirit and passion necessary for extraordinary execution. I prefer to make seed stage investments in technology startups led by entrepreneurs that are uniquely positioned to transform their industry and create new markets.
- Product-market fit - I also focus on revenue - with a focus on companies that produce a product or service that a consumer or business will pay for even in the earliest days. Inclusive is focus on leadership, brand building and community: the founders I back must have a unique ability to communicate, understand and inspire their customers, employees, partners and the broader world of stakeholders around them.
- Product - Great teams tend to create great products. That said, I believe that new companies need to create products that are more than incrementally better than existing solutions. My portfolio companies build products that are magnetic and impossible to ignore. Truly amazing product is what distinguishes a company from numerous other would-be disruptors.
- Synergies - I tend to give brownie points to startups that can add synergistic value to my portfolio and work with me on avenues to benefit them both mutually. For example - I have an investment in a company that provides on-demand shipping, a second company that manufactures custom packages for brands, and a third company that is a beauty subscription service. Since investing in them, I have identified avenues which would allow the subscription service to use shipping boxes provided by the custom packaging company and ship them using the on-demand shipping company. Even though this is just one transaction, it leads to thrice the value creation.
I love technology enabled businesses and believe that certain companies will create a niche for themselves in the on-demand economy, thus creating efficiencies across different industrial verticals. Until recently, real estate had not benefited from technological innovations. This is now changing. Technological advances in the commercial real estate sector have accelerated exponentially in the last few years benefitting tenants, investors, developers and brokers. Given my background in crowdfunding, investment banking and real estate technology, I can foresee the collaborative disruptive opportunity that exists in RETech for nascent companies.