By Abhishek Sanghvi | Reading Time – 9 mins

Startup investing has become quite a fashion in India these days. The first wave of new age tech enabled businesses came about in 2000s and Flipkart’s acquisition by Walmart in 2018 for $16Bn probably marked the first major success in startup investors securing a massive exit. With startup economy now being 2 decades old, it’s become common to see ‘Angel Investor’ as one of the keywords in people’s Linkedin profiles.

As someone who’s had his own share of failures (in my early days of investing) to significant success (after learning from mistakes and developing a more unique personalized investment thesis), I generally advice most of my friends to ‘not’ invest in startups. Because most of them have the wrong notion of startup investing. Because they are looking to invest for the wrong reasons. Because they often have a biased view (based on media reports) that’s either too optimistic (generate 100x returns!) or too pessimistic (funding winter is wiping out the industry).

So here are the reasons I believe one should ‘not’ invest in startups as an Angel Investor:

• If your ‘only’ goal is to generate ‘super-normal’ financial returns, then capital markets might be a better alternative. At least there’s liquidity, and there might be gems in small-cap / mid-cap giving equally good risk-adjusted returns
• If you expect liquidity, then stay away from startups; investments in private companies are illiquid by design (else they’d have listed, uh?). Startup investors typically invest with a 3-5 year horizon, and if you try to sell earlier through secondaries, generally it would be at significantly discounted price, rendering the whole purpose meaningless. Startup investments are for those with staying power
• If you get excited by a couple of flamboyant stories, and jump into taking exposure in them – stop! Irrespective of how attractive an investment may seem, I always recommend undertaking a portfolio approach in startups – have enough capital to spread the risk across at least 5-7 startups (if not more).
• If you don’t have a solid connect into the startup world, and have access to a great deal pipeline, then generally you’re trying to select from a very small sub-set of the overall market. One has to have access to a larger funnel to (a) find the right gems, and (b) develop the right judgement about evaluating these startups

Then, is there a reason to get into startup investing at all ? Hell yes, but I feel only in the following manner:

• Passion towards building something of substance. Yes, it’s a thing, and an important one if you’re considering startups. There are people (like me) who are super excited about the prospect of helping build something new, something big, something great. I want to be part of such stories where I feel like I’ve contributed to a story-in-making. Help founders, guide them, open doors for them, solve their problems, be their sounding board. These are things we get to do as an angel investor, but never as just an investor in public markets.
• A related benefit of above is that once you build a portfolio and start getting recognized as a valuable startup mentor/investor, you can also make this a professional career (part time or full time) as a business coach for startups, and charge for it separately. So yes, startup investment can go beyond investing and become a great career option, specially for those with 10+ yrs of work experience
• Desire to learn and become part of the future: remember, we’re talking about promising companies run by stellar founders using emerging technologies to craft the future. The learning from this journey is phenomenal. I often joked at home that startup investing has saved me the need to get a second Ivy League MBA
• Access to a great pipeline of deals (if you are doing this full-time) or relationship with angel networks / funds through which you can invest and build a portfolio (if you’re doing this part-time). In this, make sure your deal pipeline is through actual ‘investors’ and not simply brokers/advisors/bankers.

So, if you’re sufficiently-informed about startup investing, and smart about it, you can have a great ride. Else, you may end up joining a large group of people who’ve burnt their hands.