What makes angel investment a crucial aspect for the startups is that investors back it at the earliest and riskiest stage, sometimes when it is just an idea.
One cannot rely on foreign capital to do that, according to Kunal Bahl, co-founder and CEO of Snapdeal and a prolific investor who went on to start VC firm Titan Capital.
“That will need to be done by high-conviction, high-risk domestic capital which mostly comes from individuals and not institutions,” he adds.
Kunal’s own angel investments are formalized through Titan Capital, where he has invested in startups like Mamaearth, Razorpay, Urban Company, KhataBook, Shadowfax, Bira91, Uni Cards, and Jupiter.
Let’s delve into some of the top takeaways from Kunal on structuring and scaling angel investments.
The team is critical in early stage
Kunal believes that the team is the most critical factor when investing in an early startup. As an investor, he spends time with the founders to learn more about them, their educational and professional backgrounds.
It also helps when the founder is good at communicating ideas. “Having met 1000s of entrepreneurs over the last decade or more, I do feel that if an entrepreneur can mesmerize me in 45 minutes, they can likely mesmerize many other people and join hands with them,” he says.
Good entrepreneurs make you see their potential in the market
The founder-investor says that the attractiveness or potential of the market is also important. While many opportunities may not be obvious to investors at the earliest stages, Kunal notes, “The best entrepreneurs tend to be great at helping early stage investors gaze into the crystal ball with them about what the business can become when it grows.”
He says this particular trait is a consistent quality across most founders.
Unit economics help gauge the way forward
While many companies are at the earliest stages of pre-revenue, it is still important to determine what the unit economics look like. The margin structures of any business will determine what it can become when it grows, because it is structurally very tough to go from a 10 percent margin business to a 50 percent margin with the same business model.
Kunal maintains that unit economics in the early stages will paint a picture of what the entrepreneur values about the business, where the team invests time, and the experience provided to its customers.
While an angel investor should not expect detailed five-year projections, the metrics from the last few months should help in understanding where the startup is headed.
“Overall, we feel that the chances of building a lasting and enduring company will only go up if you have a clear path of being completely self-reliant from a capital standpoint, which cannot happen without positive unit economics,” he adds.
Empathy goes a long way
Founders value it when investors are empathetic towards their journey.
As someone who has been on both sides of building startups and investing in them, Kunal notes, “Founders we have backed tell us that as fellow entrepreneurs, they feel that we bring a lot of empathy to the partnership with them when figuring out the challenges and insecurities the founders go through or finding product-market fit.”
He believes this is why there is a trend of operators turning angels around the world. While this does not mean that angel investors should be available all the time, the intent to support is very important for the entrepreneur's journey of building the venture.
For Kunal, it was this passion of supporting entrepreneurs with capital, mentorship, and networking that prompted him to become an angel investor.
Kunal says investing in private markets takes tremendous amounts of mental resilience. He suggests quasi-institutionalizing one's early stage investment efforts.
When getting started, it's best to identify your best traits that top entrepreneurs would find attractive. Also, try to stay connected with investors who have a lot of experience in making early stage investments.
The key is to be very consistent.
Even when family members and friends from the ecosystem occasionally reach out for a chance to invest alongside Titan Capital, Kunal discourages the practice of investing once in a while.
He also suggests that one must keep investing at a cadence over a long period of time, across both cold and hot cycles, and build a diverse portfolio to start seeing results over a few years.
The one big hit of other investors we see are likely preceded and followed by many investments that didn't work.
Never dismiss an opportunity
As an angel investor, Kunal and his team follow a fundamental rule of never dismissing an opportunity and hear out the pitches. This helped land coveted investment deals such as Urban Company, Shadowfax, Razorpay, and Mamaearth, among others.
Good businesses may often lie in seemingly small spaces or very cluttered markets with many large incumbents.
For instance, Kunal discovered consumer brand MamaEarth when he saw it being used in his own house and learnt about its loyal consumer base from his wife. He called up the contact number given on the package and ended up investing in 2017.
“Much of investing super early or writing the first check into a company like we do is about just keeping your eyes and ears open. We often go through life with such tunnel vision that we forget to observe the stimuli and the facts around us,” he advises.
Objectively hear out founders about their pursuit, approach, and passion, and then apply your framework with as limited a bias as possible.