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December 01, 2009
Jumping the Curve
How Do Angel Investors Invest?
UNLIKE the well-organized talk by Eric Manlunas on US angel investors (which I had written about in this column), the panel discussion at the Asian Institute of Management last month was almost a bare-all session, but it allowed audiences to hear directly from business angels themselves.
The discussion started with AIM professor Bill Scheela recounting his findings from the study he did on some 40+ Filipino angels and their 237 investments. Of these, 203 were early stage investments; deal sizes were at P4 to P13 million; and average holding periods were eight years before the IPO exit.
Most were involved in real estate and business services, agribusiness and retail trading; but some were starting to explore the field of health services.These areas attracted investments because of their perceived growth, cash flow, niche opportunities and easy-to-grasp business concepts.Interestingly, more than three-fourths of the deals yielded financial performance equal to or above the investors’ expectations, and higher than what venture capitalists experience.
This was the clinical summary of their investments.The angels’ descriptions of their own experiences were unstudied, impromptu and more colorful.
One panelist, more a fund manager than an angel, receives three to four proposals a week. Most, he noted, are poorly presented and “fumble through the difference between a good idea and good business.” This has led him to prefer Stage 2 companies that have a light at the end of the tunnel. He does, however, offer his network and expertise in preparing prospects for investors even before fund negotiations begin. His top business picks? Food, agribusiness, online apps, mobile content, and Islamic banking.At the session, he identified a 40% worldwide shortage in gherkins, for which he had ready buyers.
A second angel uses his human resource firm cash flow to finance his investments, and along with a group of friends, has enjoyed good returns from his bets in an online gaming start-up and water utility.He did have a few horror stories to tell, mostly personal experiences with “greed-driven” investments and technology areas—arenas which he believes are too risky for individuals. Stick with the basic needs, he advised, such as food, clothing, shelter, water.
A third angel derived fun from investing, and counts his wife’s bakeshop as his best financing endeavor. Having reported some losses on a wine business, he instead suggested food, health-care and day-care as sectors worth monitoring. Like the second angel, however, he says he will stay out of the technology field as “we will never be cutting edge.”
The fourth angel, who claims to be a frustrated entrepreneur, had been using consultancy retirement funds to finance several ventures. To gauge an entrepreneur’s smarts and trustworthiness, this angel said look him in the eye. Doing so will also help investors determine if they will be comfortable working with him.He places his bets on the sectors of business and knowledge process outsourcing, health, and new computer operating systems, and predicts that Android mobile and computer applications will soon be coveted investment zones.
More than their personal anecdotes, these angels also enumerated a range of challenges they have faced, which include forgettable projects and deals gone bad. Other obstacles listed were: entrepreneurs who do not quite understand their businesses and who fail to place value on their own ideas and time; business plans lifted from the web; and the investor’s greed, ego, and eagerness to invest.
One angel also realized when he turned 60 that he needed to change his investment risk profile in favor of a fixed income, while another professed that “preparing the soul for the here-after” had been taking more of his time. Some admitted to having difficulty letting go and letting the younger ones do the risk taking.
Indeed, the session made the audiences realize that there may be no “typical” angel; that these investors each have their own, unique investment criteria; and that their objective business analyses are also influenced by personal factors such as one’s source of funds, ego, risk-aversion, entrepreneurial experience, and age or their perception of their remaining years in active investing. Even the type of co-investors and one’s personal familiarity with an industry is bound to affect his investment decisions.
Venture capitalists tend to able to articulate their investment criteria much more clearly and up front, but even with the angels, one must agree with the adage that second to knowing his business, the entrepreneur must also know his investor.
(Federico C. Gonzalez is the president/CEO of the Philippine Emerging Startups Open, Inc., which runs the PESO Challenge, and project director of Ayala-TBI Tech Boot Camp; he is a lecturer in Technopreneurship and Innovation, and a mentor to tech start-ups. He may be reached at fcg@gonzalezfund.com)
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