This episode discusses how you can get started in angel investing – how many companies should you plan to invest in, how many should you evaluate before you make an investment, where to find deal-flow, how to connect with early stage companies and more…
This is Propel(x) podcast, discussion on investing in all things startups. Startup investing is highly risky. Please listen carefully to the disclosures at the end of this podcast.
Andy Reed: Hi everyone. This is Andy, and this is the Propel(x) podcast. Today is our second episode. We’re going to discuss how to get started investing in startups. With me today is Swati Chaturvedi, CEO of Propel(x). Hi Swati
Swati Chaturvedi: Hey Andy.
Andy Reed: So let’s start again from the beginning. I mean, this is really a podcast that’s geared towards people who want to get started in angel investing. And I think one of the things that we often get a question on is where do you begin? How should they think about the process? What are the first steps? So what are your thoughts on day one? Where do you begin?
Swati Chaturvedi: Yeah. Well, let’s start discussing what the process really is. So the process of investing starts from sourcing, sourcing deal flow. So, you source deal flow, evaluate the deal flow; does this make business sense? Then if you think that this makes business sense, you should conduct some legal digging- legal diligence. You make the investment, then you have to stay in touch with the company, you get investor updates and sometimes you have an exit. So it is a process. And step one on that process, to be honest, is deal flow – getting the right deal flow. This is not like public market investing where you have a standard set of opportunities and you can only buy and sell them. You can actually engage a lot more, but getting the right deal flow is the single most important thing.
Andy Reed: Yeah, that makes sense. So, how do you suggest that folks go about..especially new angel investors go about it? How do they start collecting deal flow?
Swati Chaturvedi: Yeah. So there’s lots of sources depending on where you’re located. Deal flow or startups really tend to start in hubs of research, investment, technology, and so on. If you look at the U.S for example, there’s the Boston Hub, there’s the Silicon Valley Hub and there’s one or two hubs here and there, Austin is coming up as a hub. So startups tend to be concentrated there. And so if you’re in that hub, that’s awesome. You have all the deals that you need, but if not, it’s harder to come by. And so you have to look at alternative sources. Typical sources would be whether it’s alumni networks, incubators, accelerators, angel groups, online platforms: all of the above. And we can talk more about each.
Andy Reed: Right. I know that some of the alumni groups are pretty active, so that’s a good place to start and people might feel comfortable in the community that they’re already in. So let’s just say someone shows you a deal. What do you do?
Swati Chaturvedi: Look for the pitch deck.
Andy Reed: And what’s the pitch deck?
Swati Chaturvedi: So what’s the pitch deck? A pitch deck is a set of slides that describes the business. So it tends to be quite informal unlike a public market; a set of slides that are not reviewed by legal and auditors and this and that. It’s, it’s informal. Think of it as informal where there is nothing that is stated in it that you can hold anyone to account. But it is called… the standard terminology is a pitch deck. So you start from there,
Andy Reed: It’s basically the founder’s vision of how they see the company, their product, the market, all the different components of what would make in their view, a business case for investing in their company.
Swati Chaturvedi: Yes, absolutely. So that is what a pitch deck is. But before we go there, I do want to go back a little bit.. to talking about the various sources of deal flow that we just discussed. Right. We said there are alumni networks.
Andy Reed: That’s an easy one.
Swati Chaturvedi: That’s an easy one. You know, you might even know the person who is starting…
Andy Reed: Sometimes they cost money though.
Swati Chaturvedi: Yes, sometimes they do cost. There’s incubators and accelerators. But again, those tend to be concentrated where startups are beginning; research centers, education centers, where they are labs and so on. And so..but they do host demo days. So there is a specific day on which all the cohort of startups is going to graduate. So the way incubators work, as you know is they will accept applications and then they will admit. Very much like a college or university, they will admit startups into their program. And these typical programs are three to six months long at the end of which all of the startups graduate and all of these words are in quotes. But when the startups graduate, they get the opportunity to demonstrate their wares. And so at that point, incubators and accelerators will invite external parties—investors primarily—to showcase the quality of the startups to help the startup just get more airtime, so to speak. That’s a great time to go and visit the startup. Look at the demo day. You’ll get to see 7 to 12 companies talking about their business at the same time. You’ll get to understand what constitutes or how these pitch decks are structured and how companies present. So I think that’s a really good way to get started. Of course, assuming you’re not in that incubator hub, you might have to drive a few hours, but it might be a worthwhile effort to get started.
Andy Reed: Yeah. They’re pretty fun and interesting. And people are generally pretty welcoming at them, so they tend to be a pretty exciting place to go visit. I think it’s a great idea.
Swati Chaturvedi: And then there are angel groups. Most regions have their own angel groups. And then there’s the Angel Capital Association. Just in case you’re wondering where to find the angel group, well, first Google. Use Google to find your local angel group. Otherwise, the Angel Capital Association is pretty good. It has a listing and they’re a membership association. So the biggest angel groups are members of the Angel Capital Association. At this point, I believe they have 15,000 members, individual members. But there are lots of angel groups across the country, find one. Some resources are the Angel Capital Association to find it. They can cost like we discussed cost, right? So angel groups do have a membership program, but I wouldn’t become a member. I mean, don’t spend money unless you have to. Right? So I wouldn’t become a member unless I really wasn’t finding deal flow elsewhere.
Andy Reed: Yeah. Maybe when you’re a little more mature in the process, but really the purposes of today’s podcast is, Hey, let’s get started. So you said, you know, check your alumni groups, check your area to see if there’s any incubators, and then check the Angel Capital Association website to see if there’s a local group and that you could probably go and visit for free and just kind of get an orientation. Are there any other resources that you recommend?
Swati Chaturvedi: Online platforms.
Andy Reed: Yeah.
Swati Chaturvedi: And the reason that that’s so good, you sit in your home without having to make any effort. You can visit an online platform. If you’re an accredited investor, you get to see deal flow. You get to see our pitch decks. You get to participate in webinars, investor calls. It’s easy. It’s free. You can get started today from the comfort of your home. So that’s an easy way to get started. But I think the real feel of it comes from meeting the startups. And so these others are in-person efforts.
Andy Reed: Yeah. I think that’s a really good advice. So we talked about deal sourcing and kind of getting your feet wet, we talked about the idea of the pitch deck and looking at pitch decks. Do you have any kind of like.. key insights or tips about going from one pitch deck to many pitch decks to an investment? I mean, is it just like love at first sight? Or what are your thoughts on that?
Swati Chaturvedi: No. Don’t fall in love at first sight. That’s precisely the wrong thing to do. One of the investors- early investors, that’s a key mistake they make. They invest in the first deal that they see and they invest a large sum. So you end up putting a lot of your eggs in one, not very good basket. The key thing to do is to evaluate don’t get serious until you’ve…
Andy Reed: Right. So the first step is really around the practice of looking at deals, right? So you’re doing it by virtue of going out and sourcing deals. You are doing it by virtue of building a library of pitch decks that you have, that you think about, that you talk to people about. And as you do that, I mean..it’s just like conditioning or any other training you’re getting you’re sharpening your mind.
Swati Chaturvedi: Yes. Precisely.
Andy Reed: Because it’s very high risk.
Swati Chaturvedi: Because it’s very, very high risk and there’s some data around how many you should be seeing, or you can set a target around how many pitch decks you should see before you get serious about one. So for example, there’s the University of New Hampshire. They have a center for venture research, and as per their data, there’s about a 15% yield of investments for startups. In other words, 15% of the startups that are looking for funding actually get funding.
Andy Reed: Mostly 85% are rejected.
Swati Chaturvedi: So, by that metric, you know, only about one in seven is actually getting invested. So you should look to get at least 7 to 10 pitch decks before you think of it. I mean, going by that data. Of course, venture data is even much steeper chances, right? That you’ll actually get an investment. 2 to 3% of the companies that pitch to venture investors actually get invested. So if you are a venture investor, you want to be looking at 50 to 200 companies, something like that before you actually make an investment. So we should learn from this data. So early-stage investors should look to this data to inform them. And basically what this is suggesting is that try to look at at least 10 pitch decks and have conversations with at least 10 companies before you get even serious. And then you can evaluate.
Andy Reed: Yeah. So I mean..I’m definitely hearing that there’s a long engagement process before you can be an angel investor but not yet investing, and that there are a lot of different sources to do that. Mostly what you should be thinking about is sharpening your skill set. And from an angel perspective, about 85% of the companies that you look at are not going to get investments; from a venture perspective, it’s almost 95%, if not more. The other thing I just want to kind of circle back on is; previously we had kind of mentioned this idea of pacing yourself to build a portfolio. That’s a theory that a lot of people in the industry kind of ascribe to. So I think it’s also good–we can go into more detail about that later, but to keep in mind that whatever you start with, you have to kind of pace yourself. So it’s not just like a hundred and then you hit your 10. It’s like for every quarter, you should look at a hundred deals. That’s a very aggressive strategy.
Swati Chaturvedi: Yeah.
Andy Reed: So I think that’s all very useful information. I think that one of the things that a lot of people are going to struggle with is getting to that volume, and so I just want to check in with you about; what are tips that you might have to get to that volume?
Swati Chaturvedi: Yeah. Well, volume really only comes if you’re at a place that has critical mass, right? Either a demo day in one sitting, you get to see seven to 10 or angel groups. But angel groups tend to have maybe in one presentation, one or two or three companies presenting is more one-off. But certainly, platforms, because many of them out there. And this is a little bit of a shameless plug, but honestly, that is the whole point of using technology…
Andy Reed: Totally, yeah.
Swati Chaturvedi: ..to make this available. So platforms definitely have multiple deals. You’ll have multiple pitch decks, which you can view at the same time. So that really helps sharpen your skills and there are educational materials on most platforms. Do use them because they are good tips and good advice.
Andy Reed: Great. Well, that’s super useful. Thank you for taking your time to speak with everybody. I think that the big takeaways are; meet at least 10 startups before getting serious about even evaluating one of them, meet startups through your own network through the local community that you’re a part of, and then do leverage online technology. I mean, that’s what it’s built for. So online platforms are a great way to quickly come up to speed. Next up, we’ll be discussing the next step, which is how you do actually go about evaluating a company. Until then, this is Andy.
Swati Chaturvedi: And this is Swati
Andy Reed: And this is the Propel(x) podcast. Thank you.
Disclaimer: Propel(x) is a funding platform, not a Broker-Dealer. Securities are offered through Hubble Investments, member FINRA/SIPC, and an affiliate of Propel(x). Private investments are highly illiquid and risky and are not suitable for all investors. Past performance is not indicative of future results. You should speak with your financial advisor, accountant, and/or attorney when evaluating private offerings. Neither Propel(x) nor Hubble Investments makes any recommendations or provides advice about investments.
Content Disclaimer: Past performance is not a guarantee of future performance. The investments mentioned in this podcast (if any) are illiquid and there is no guarantee that an exit strategy will come to pass.