When I first started angel investing in 2009 in India it was considered (and probably still is) a from of gambling that was reserved for haughty, tech-obsessed, introvert & radical investors who were chasing a pipe dream in that one “jackpot” investment that would make tons of money to cover all losses.
Infact I vividly remember my father having a tough time explaining what I was doing with my career to friends or family with any semblance of pride.
I must be honest – I was very green and still learning the ropes of investing in public markets at that time let alone the world of the unlisted! I just knew that there was going to be a winning set of rules that will separate the winners from the losers in this space.
So over the years I have read/seen/heard, tried & tested the theories many types of early stage investors from across the globe. I have imbibed their knowledge & experience and combined them with knowledge & experience of the great investors (like Buffet, Soros, Munger, etc) in developing a set of rules that have worked very well for me.
Disclaimer: Probably none of these are my original creations and I have no intention to impart any investment advice. I am just jotting down what I follow as simple rules and could be handy for you too in evaluating a startup for investment
- Invest a maximum of 5-10% of your overall portfolio into early stage
- Divide that amount into 10-12 companies to be invested into annually
- Build a diversified portfolio
- The earlier you invest the larger the risk and the reward
- Set a maximum valuation over which you will not invest – doesn’t matter how well the company is doing
- Bet on the founder & not the idea
- After the founder the “lead” investor has the 2nd most weightage in the investment decision
- Make sure you have set aside money to invest in follow on rounds
- Build a portfolio of startups instead of a startup that makes up your entire portfolio
- Invest in businesses you understand (conceptually)
- Completely understand their revenue & profit model before investing
- Take enough equity for your money to make it worth your time
- Leave enough equity on the table for the founder to stay motivated
- Be prepared to book losses quickly and workout a tax efficient strategy for winners
These are the rules that have helped me and have given amazing returns to many investors that I have met who have been generous to give me the opportunity to learn from their experiences.
Would love to hear your thoughts on these..