The fascinating world of angel investing in Southeast Asia, from picking the right founders to investing in ICOs

How are valuations justified? Why do different angels have different investment pedagogies? How many portfolio companies should an angel aim to have? How should angels manage risk and make investments?

On the 19th of May, the Business Angel Network of Southeast Asia (BANSEA), organised a half day academy for angel investors. Leading figures in the angel investment community, including James Tan, Managing Partner of Quest Ventures and the newly elected Chairman of BANSEA, Michael Blakey, Managing Partner of Cocoon Capital, and “UK Angel Investor of the Year 2015” (UK Business Angel Association), and Dr. Rex Yeap, Partner at Invention Capital and Vice-Chairman of BANSEA, shared their insights during the session.

What do early-stage investors mean when they say “we invest in people?”

One of the key takeaways is that early-stage investing is an art, rather than a science. A common thread across all three speakers was the emphasis on the ‘quality of the founder’. Investing in people does not mean investing in the most charismatic founders, or the most ‘people friendly ones’. It means investing in entrepreneurs who have are driven and tenacious, critical thinkers that understand the market and the problem, and innovators that are not afraid of breaking the rules once in a while.

Commitment

James emphasised that founders should be focussed on their startup and only their startup, and that ‘all other bridges should be closed off’. The sentiment was also echoed by Michael. Founders should not be startup enthusiasts, and focus is pertinent to a startup’s success. Rather than running five different startups at the same time — which is a cardinal sin — founders should be able to identify ideas and industries that they are most passionate about.

References

Michael mentioned that he would typically rely on references by other angel investors or industry experts when making an investment decision. When attempting to understand a founder, the best way to identify if he/she would make a good founder would be to reach out to individuals that he/she has worked with before. James mentioned that he typically invests in founders that have been referred by other successful entrepreneurs.

Also read: Need an angel to back your early stage startup? Here are 5 types of investors you should look for

A hint of insanity

Entrepreneurs with the most disruptive ideas tend to have a refreshing perspective on the world. Michael remarked that he is looking for founders that are not afraid to challenge the norms and industry expectations. That said, Michael also mentioned that entrepreneurs must be grounded, and the science or technology behind the product must be feasible. If angels or VCs don’t have specific domain expertise, they would typically attempt to understand the viability of a founder’s breakthrough idea by interacting with domain experts and connecting with potential referees.

Diversification is key, and risk management through syndication is a good strategy

During James’ sharing on his Investment Pedagogy, he mentioned that angel investors place no more than 10% of their wealth into early-stage investing, and should attempt to have 20 to 25 investments to maximise their returns and diversify their risk. This is because every 9 out of 10 startups fail, and

What do angel investors think about ICOs?

With the recent boom of initial coin offerings (ICOs) in Singapore, Dr. Rex Yeap decided to share his insights on investing in the ICO space. Surprisingly, sophisticated angel investors view ICOs no differently from startups. They discount the irrational exuberance and ‘Fear of Missing Out’ (otherwise known as FOMO), and perform due diligence on ICOs extensively.

One of the examples that Dr. Yeap gave was the investment that BANSEA made into Tokenize.exchange. When making the investment, Dr. Yeap and other angels from BANSEA met the founders of Tokenize personally to understand the motivations behind the founding of Tokenize by the founders. Dr. Yeap also mentioned his disgust over the sheer number of scams in the ICO market, and mentioned that angel investors looking to invest in ICOs must do so with a heightened sense of acuity. He elucidated the numerous ways that angels can work with other investors and industry experts to identify potential ‘winners, losers, and scammers’ in the ICO market.

Are valuations sought by founders over-inflated?

One of the key contentions at the academy was the value that investors should place on startups. Clearly, different angels at the academy valued startups differently. James, however, summarised the situation aptly. He mentioned that it is ‘difficult to nail early-stage valuations’ and that investing at an early stage is typically an ‘art’. However, he also mentioned that there are several cases whereby founders are requesting for valuations at an overly rich price point. For example, he is seeing an influx of pre-product and pre-revenue startups attempting to raise series A valuations, though unsuccessfully.

Also read: I met with some of the biggest angel investors in Southeast Asia, and here are some insights I learned

In general, unless the startup is operating in the hardware space, biotechnology space, or requires extensive amounts of funding for regulatory structures, seed-stage startups from Singapore should be valued at around S$1 million, and Series A startups would typically be valued at S$3 to S$5 million.

Is angel investing for everyone?

One of the key insights that Michael shared was that angel investing is a long-term play and that angels need to be patient with their investments. With typical exit timeframes of 7 to 10 years in Southeast Asia, angels should only deploy funds that they are able to set aside for extended periods of time.

James added that the risk involved in angel investing is difficult to stomach for some, and that risk averse individuals would be better off finding other types of alternative investments, or working with experienced professional investors to invest their funds. He recommends that angels ‘take their first year slow’, and take that time learning from other angels and understanding the ecosystem. If after a year, they find that angel investing is not for them, ‘there is no shame in leaving the ecosystem’.

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