SINGAPORE (Apr 29): Entrepreneurs motivated by what they see as the next big thing are not the only driving force of a thriving start-up ecosystem. It is the growing ranks of angel investors, in giving start-ups early financial support, who help complete the virtuous circle.
Just as not all start-ups come with exceptional nor sustainable business ideas, angel investors come in different stripes and creeds. Some, instead of helping, are a hindrance with their dominance; others, instead of being “angels”, are better described as “angels of hell”. Instead of helping to take the start-ups to the next level, these “angels” take them to court. “You invest $50,000 to $100,000 in a start-up, but you spend $60,000 on legal fees. The logic is not right,” Huang Shao-Ning, “chief angel” and partner at AngelCentral, tells The Edge Singapore.
The way Huang sees it, angel investors should be more like “cheerleaders”. She recalls how she and seven other angel investors helped a demoralised start-up founder get back on his feet after his start-up failed. “All eight of us were trying our best to make sure the founder didn’t feel so depressed,” she says. “You have to sing the same tune.”
Angel investors are usually high-net-worth individuals who fund early-stage start-ups in exchange for convertible debt or equity. Their financial support is crucial, as other investors, such as venture capitalists, prefer to wait and see a start-up chart growth before they invest in it.
As the investment community becomes more sophisticated, more individuals with the means are eager to become angels themselves. Unfortunately, few people understand how angel investing works and the role that angel investors should play. This can spell either success or failure for a start-up from early on. Just as start-ups need help and support, so do some angel investors, which is why AngelCentral was set up.
Huang, via AngelCentral, aims to build an “effective” angel investor community in Singapore and the region. To this end, it organises classes on the basics of angel investing. Topics include sourcing for deals, performing due diligence and engaging start-up founders before and after an investment. These sessions are usually conducted by Huang and her AngelCentral partners, who are her husband Lim Der Shing and Phey Teck Moh, former Asia president for Motorola Solutions and now chairman of investment advisory firm Xpanasia.
AngelCentral also helps angel investors develop a better perspective of individual sectors. For instance, what do they need to know before investing in an e-commerce or biotechnology start-up? Industry experts are brought in to teach these sessions.
Finally, AngelCentral provides a platform to make deals. The company regularly organises pitch sessions for start-up founders to sell their business ideas to angel investors. Interested angel investors can either invest directly in a start-up or do so via a syndicate that pools funds from angels.
AngelCentral has been a hive of activity since March 2018, organising more than 10 pitch sessions that featured more than 50 start-ups from different industries brought in by Huang and her partners. The company understands that about 30 start-ups received total direct funding interest from angel investors of about $6 million in 2018. In terms of syndication, it has facilitated seven deals worth a total of $2.5 million so far.
So far, AngelCentral has built a community of more than 100 paying members, who are typically in their 40s and 50s. They include those who are semi-retired professionals, start-up founders who have cashed out and are now investing in other start-ups, as well as representatives from venture capitalist firms and family offices.
Despite their diversity, AngelCentral members — who are based in Singapore and the region, and even as far away as Germany — are bonded by a passion for investing in start-ups. “It is like an angel investor kampong. Every time we do [an event], you will see [familiar] faces. We have become friends,” says Huang.
Angel investors have found AngelCentral to be a useful platform. “The experience has been positive. The team at AngelCentral is well organised and has a good deal flow of start-ups covering a myriad of different industries,” says a CEO from the private sector who is a member of AngelCentral and requested anonymity. “It is a good platform for meeting potential start-ups looking for investors and for networking opportunities with fellow investors; and the relevant workshops conducted help to hone my investment skills.”
‘Pay it forward’
In a sense, AngelCentral is itself a start-up. It was incorporated just over a year ago by Huang, who was “figuring out what to do next” after she and her husband, who co-founded JobsCentral, sold their stake in the recruitment portal to CareerBuilder for an undisclosed sum.
During this time, Huang and Lim met many angel investors. She was also giving talks to start-up founders at events organised by venture capitalists and Enterprise Singapore, the government agency in charge of helping local companies grow. “There were very few people [at that time] who exited [their start-up business]. We were attracting a lot of start-ups who came to us [for advice],” she says.
That observation prompted Huang to “pay it forward”, by figuring out how else to help the community. She ruled out yet another start-up incubator or accelerator. Recognising the critical role that angel investors play in the ecosystem, Huang decided to focus on them in a more structured way. “If angel investors don’t invest well, they are not going to last. And if they are not going to last, start-ups are not going anywhere. So, we want angels to invest better,” she says.
Cut out to be an angel investor?
Having a pile of cash does not necessarily mean that one can play the role of angel investor well. More start-ups fail than they succeed. Angel investors should invest only if they are ready to write off the sum if the start-up fails. Huang explains how to invest in bite sizes via a portfolio approach. She says, “Let’s say you put aside $200,000 to $250,000 a year. Instead of investing in two deals, you can [reduce the investment size] to $40,000 to $50,000 [a deal] and have a portfolio of five to six companies. Over a period of five to six years, that gives you a portfolio of 20 to 30 companies. Diversification is key, especially when it is high-risk [investment].”
In addition, valuations for start-ups are difficult to determine using traditional metrics. There are no price-to-earnings ratios to ponder, no free-cash-flow analysis to make, and no sum-of-the-parts valuations to decipher, as start-ups are almost certainly burning cash. Rather, it is more about sizing up the start-up founders and determining whether they have the will and skill sets to grow the business, says Huang.
And, like all investors, angels should always plan for how they want to exit the investments. Huang says she usually exits a start-up when the founder himself does so. “We are not [adamant about going for an IPO],” she says. “Our philosophy is to invest in a start-up because we like the founder. If the founder wants out, we want out too.”
