Angel investing 101: How to build a solid portfolio

My journey as an angel investor (2014-21) & some insights to help you get started

Hi there - this piece covers my journey as an angel investor & will help you understand how to get started. I’ve been fortunate to see a couple of ‘hits’ in my current portfolio, but I also talk about how I failed miserably when I first started investing because I didn’t understand the risks and market dynamics. Investing in startups is highly risky and illiquid but there are still some fools (like me) who chase and enjoy the adrenaline rush. By no means is this piece a declaration of me having ‘made it’ as an angel investor, because I haven’t - it’s written with the intention to ‘build my portfolio in public’. :)

PS: I haven’t shared specific valuation or deal details because the information is confidential.

Why I invest

• To get a front-row seat to watch & learn about the future being built. 

• Investing in founders makes me a better founder.

• Living my purpose of being in service to give back and create opportunities for others, particularly underrepresented founders.

Focus areas

• Global Enterprise SaaS 

• Consumer - Social + Enablement layer for D2C brands

Framework for investing

• Founding team market fit

• Large markets that would benefit from sector tailwinds

• World-class products with fanatic love from users

• Pre-seed & Seed stage

Angel Portfolio: Plum, Kutumb, Chingari, Rupifi, Clickpost, WorkApps + a few more (in stealth or haven’t publicly announced) are some of my investments thus far. Mode of investing has primarily been through syndicates & micro-VCs (Gemba Capital, First Principles, Better Capital, Cloud Capital, First Cheque, 91 Ventures, AngelList India), although of late I’ve made a few direct investments too. While time will tell how these companies perform in the long run, as of 2021- some of them have raised large rounds already, backed by really incredible investors. While valuation mark-ups are great, they're nothing to get excited about because as an angel the best mental model is to prepare yourself for no liquidity for 5-8 years from this asset class. Overall it’s best if you forget about this capital & consider it as ‘written-off’. And if & when returns come, find yourself pleasantly surprised with the outcome of your patience. 

Returns as an angel: As far as returns go, a good angel portfolio should be able to deliver 15-18% IRR annually. However you must understand that returns in VC follow the Power Law Curve i.e 1-2 out of your 20-30 investments will be multi-baggers and deliver stellar returns, the rest will either die or not perform well. But the ones that do perform well, will deliver big enough returns to not only cover your invested capital but also some more. Here’s a performance graph of a16z, a leading VC firm- most of your returns come from the top deals in the portfolio, while the others lose money.

How to start your journey as an angel investor

• Research and subscribe to quality syndicates and angel platforms. Get your hands on as many deal memos as you can. Typically VCs look at 100-200 companies for each investment they make. As an angel, it’s in your best interest that before you put real money to work, you try to understand the pattern of good vs poor investment decisions. 

• Build a dummy portfolio, especially if you are not from the tech ecosystem. This will help you track the quality of your decision-making process. Remember, it’s all about getting into the best deals & quality of founding teams - if you fail in sourcing good quality deals, unfortunately, your portfolio will not perform well.

• Remember to start with small cheques. It’s a myth that you need a lot of capital to get started. US deals accept as low as $1000 cheques from angels and for Indian deals typically the min ranges from INR 3-5L ($4-6K).

• Invest in the first 5-10 companies. Write small cheques, the goal is to diversify your portfolio to leverage the Power Law of VC returns (as discussed above).

• It’s important to build your portfolio over at least 4-5 years and invest in at least 20-30 companies to build a truly diversified portfolio. Pace yourself. Give yourself time to understand market signals & how the startups are performing and keep re-evaluating your decision-making process. Identify the good, bad & ugly of your portfolio and try to improve over the next set of deals. 

• How to know the health of your portfolio is either through the monthly updates that some founders make a point to share with all their backers or through the follow-on rounds that happen. This is when you can choose to invest pro-rata too, to really ‘ride your winners’ which basically means you invest capital in follow-on rounds to protect yourself against dilution (i.e maintain your shareholding in the company).

• It’s also important to note that the market itself goes through different liquidity cycles, so sometimes when you get lucky in a bull market, don’t overestimate your smarts and when you get unlucky in a bear market, don’t lose hope. 

• Typically you’ll know if you have breakout companies in your portfolio within the first 2 years..but there’s really no point in getting excited about valuation mark-ups because you won’t see the returns for a while. This is why only start angel investing if you can give yourself 5-10 years to see the returns. If you don’t want to play the long-term game, you’re better off investing in other asset classes.

• Of course, the other way is to back micro-VCs and become Limited Partners in funds to get exposure to the asset class and passively invest in startups through professionals. This option is what most people should go for, especially if there’s little experience in the tech ecosystem because it’ll save you from things that you don’t understand.

• Lastly, while investing in public markets and startups are both very different ball-games altogether, what is non-negotiable and absolutely crucial in both is the quality of promoters/management teams. Best teams build the best companies - there’s just no way around it. Stay away from shady deals, founders who lack integrity, and always do your diligence and reference checks before committing to a round. 

• If you do well & find your groove, opportunities to lead your own syndicate, start your own micro VC fund, OR a role in the investing team of a fund will start showing up. Success begets success. :)

• If you’re fortunate enough to get into good deals, try your best to add value to the portfolio companies. This could be through introductions to potential investors or customers, through feedback or sharing your domain expertise.

Context: My personal journey of how I got started.

I started building businesses really young. In university itself, I tested 3 different business models - a) a platform to rent designer wear  b) a citizen-led platform to report crimes, mishaps and societal issues to authorities (this was at a hackathon at Oxford University where an investor offered us $250,000 but we declined) and c) a platform to connect students to internship opportunities with startups. I won’t call these failures, because they were actually experiments that set the tone for my 10 year journey since then - where I’ve built businesses, invested in companies and built global and local programs to support and help founders. 

I’ve seen the startup ecosystem evolve not just in India where I’m originally from, but also in the UK (where I pursued my undergraduate degree) and in the US (with my experience at Facebook, Harvard and fellowships like the Rajeev Circle & WEQ by Anita Borg Institute). After university, I moved back to India due to personal reasons and found myself in Lucknow again where the tech ecosystem didn’t really exist back in 2013. I started building a simple e-commerce model for artisans in rural communities where we would help them to sell their products through ecommerce portals, exports and at exhibitions across 3 countries (UK, Dubai & India). This platform saw moderate success, where we saw artisans’ earnings increase 300-500% when they started working with us. This model had a real and meaningful impact but early on the journey we realised the limitations of this model as each artisan made product was unique & scalability was a huge challenge and to add to that, e-commerce was still pretty nascent. As we kept building this, the team stumbled on a bigger and more complex problem that we could help solve: technology for microfinancing institutions (called MFIs or NBFCs). Working with these artisans day in and out, we realized that the artisans borrowed money from microfinance institutions to procure raw materials & cloth and then the loan collectors would visit on a daily basis to take micro-deposits from them to enable them to repay these loans. All this used to happen through agents of NBFCs that would go out for collections every day (they had memorized the routes, names & amount to be collected) and would fill out the amount & info on paper forms then go back to the NBFC queue in line for 3-4 hours where all this information would be manually uploaded into the system. Being an engineer myself & with the support of 2 more developers we quickly put together a prototype of an android application that would help facilitate these transactions on ground and root out the operational inefficiencies. This model was scalable and within 4 months we saw 400+ agents use the app to facilitate close to ~$5M in transactions per month (~$60M/year). We piloted with other NBFCs as well..and then demonetization happened where the NBFCs went completely cash dry for months. This is when the NBFC that we first started with, made an acquisition offer for the product and the team collectively decided to take it up. As a founder, this was a tough phase to navigate - I could see joy and wealth creation for team members on one side but a personal void on the other because it felt like a deep personal loss. After 4 years of diligently working on a goal - I had to find a new identity & purpose. Post that, I decided to consciously give myself time to figure out 2 problem statements - 1) Demystifying the VC world so that I could understand what makes businesses investible 2) Building for massive scale. Both these problem statements were solved for me in the following 3 years where I had the opportunity to work on the Investment Team of Lumis Partners and lead Startup Programs at Facebook for South Asia & India. I call this time my corporate sabbatical as it taught me the ‘laws of the land’ outside of the little bubble of entrepreneurship that I had known thus far. I learnt about what to look for in startups and their founding teams after having evaluated close to 1500+ startups (if not more) in various capacities and met some incredibly bright & driven people who went on to build successful startups. Now that I was in the ‘inner circle’ I felt more confident going back to angel investing than I had in the previous years. I had made some investments back in 2014-17, without understanding the ecosystem and market dynamics well & failed miserably. After quitting FB in December 2019, I started to look at deals again and in the past year and some, have backed some amazing startups while building my business development and marketing firm (Hustle Hard Ventures) and my family office (Swadharma Source Ventures).

If you enjoyed reading this piece, please do subscribe or share with your friends. I write a weekly newsletter about investing in startups, crypto and stock markets called ‘The Eudaimonic Investor’.