So You Want To Be an Angel Investor? The Issue Is Exit

While it is easy to invest at early stage, exit could be a hurdle if VCs don't find value in the startup

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Arvind Khaalibaithnewala shifted his considerable bulk on the sofa and absent-mindedly flipped channels on his television. Known as Khaali to his friends, he was in his fifties and had recently quit his job with a multinational corporation to “pursue other interests”, as he explained to his wife. He had a comfortable lifestyle: his own house in a decent locality, club memberships, enough money to take a foreign vacation from time to time. The stock market was doing well, and provided him with the funds to live the kind of life he did.

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Things should have been hunky dory. But a keen observer of human nature would have noticed that they were not. There was something missing. Life was too boring: no excitement, no challenge, same old parties, the same Black Label every evening.

At that moment, Sanjiv Paisabhai--or simply Paisa to his friends--walked in. Another ex-MNC guy, and a good friend. “Khaali, why don’t you join me for this month’s Winged Angels meeting?” he said.

“Angel meeting? Angel investing? No way Paisa! I do not have a few spare crores lying around to put in,” was the immediate response. “Leave that to guys like Ratan Tata.”

“Boss, you don’t need to be a Ratan Tata to be an angel investor. This is the age of the ‘aam aadmi angel’. Do you know, even an investment of INR 5 lakh is OK?”

Khaali sat bolt upright, as far as his bulk would permit, of course. “INR 5 lakh? That’s all?” The television remote was forgotten, and his eyes gleamed. “Tell me more.”

“Just come with me to the meeting. It’s on this Saturday.”

So Saturday saw the two friends walking into one of the conference rooms at IIT-Delhi, all set for the monthly Winged Angels meeting. There they met several other angel investors, and Khaali was able to speak to them over coffee. “Why are you into angel investing?” was his favorite question. And the answer was varied. “I get a chance to be involved in running a business. Without the stress of managing it 24x7”. Or, “These are bright youngsters, with great ideas, lots of energy and enthusiasm, but very little experience. I can use my 30-odd years of experience to mentor them. So it’s a great win-win”. And so on. And with each person he met, Khaali became more and more convinced that angel investing was the way to go. In his mind he was already looking at it as his next career – perhaps till the age of 90. His visiting card would say, ‘Arvind Khaalibaithnewala, Angel Investor and Mentor’. Already he began to feel more active.

And so the meeting started. The first presentation was by a company called Greatstay, which was in the area of service apartments. They would rent out large spaces in residential areas, furnish them, and then lease them out as service apartments where they would manage everything from maintenance to the plants to cleaning, etc. In other words, the standard concept of service apartments.

Khaali felt himself getting excited. The market for such an offering was huge, and the venture appeared to be profitable. Mentally he started figuring out which fixed deposit he would break to invest in this company. However, he had to drag himself back to the present because the presentation was over, the founder had left the room, and the angels sitting round the table were discussing the deal. There were many viewpoints shared, but one particular comment struck a chord with Khaali. One of the angels said, “Boss, in today’s COVID times, service apartments are a bit of a question mark. When I make an investment, I expect it to appreciate, and get an exit. But I don’t see myself getting an exit in such a company, at least in the foreseeable future.”

“Therefore I am not investing,” he said loudly. “So there.” And he promptly got up to get a cup of coffee (beer, unfortunately, was not on the menu) as if to close the discussion.

After the meeting, Paisa explained to Khaali. “You see, when you invest in the stock market, you buy shares that are listed. Which means you can always sell them later. We call this an exit. But in this game of angel investing, shares are not listed. So we would need to find someone – perhaps a VC – who is interested in buying your shares. And why would this VC invest? Because they are confident that they, in turn, would be able to sell their shares to some other VC. And that’s the key: VCs will only invest if they are confident of getting their exit when the time comes. But with COVID around, and the third wave threatening to hit us any time, you will find it tough to find a VC to invest in such a business.”

And as they walked into their favorite pub for a beer, Paisa had the last word. “Remember, one of the key issues to keep in mind as an angel investor is, “Are you likely to get an exit?”

Khaali was impressed. Today he had learnt something about angel investing. But he had a lot to ask, “Paisa, what about valuations? And scalability? I’ve read about these terms in the papers. And if I decide to invest, how do I go about it?”

Paisa smiled. He had got his friend hooked onto a second career. “Patience my friend. All in good time. Keep reading Entrepreneur, and you’ll get your answers. Right now let’s focus on our beer.”

“Cheers!”

Written By

Dr. Dhruv Nath is an Angel Investor, Mentor to startups, and Director with Lead Angels. He is also co-author of the book, “Funding Your Start-up: And Other Nightmares, published by Penguin Randomhouse