How to Choose Your Investors
Advice from one of Southeast Asia’s most active angel investors
PHOTO CREDIT: Getty Images
For many entrepreneurs, raising a round from angel investors can be a critical early step for their start-up. This seed round gives entrepreneurs a runway to build their product and gain the users or revenue that would make them attractive for further investment.
One of the most experienced angel investors in Southeast Asia is Lim Der Shing of AngelCentral Investor. Together with his wife, Shing began angel or start-up investing in 2011 and committed more seriously when they retired in 2014. They have made 17 angel investments and another 7 venture capital and accelerator type investments.
In choosing angel investors, he recommends that founders look for those who truly understand the risk they are taking.
“Next, if possible, those who are able to take an advisory type role with you or who can help you with their network. Thirdly, you want investors who are cheerleaders for the business. Finally, you want investors who behave like investors and who don't feel they are entitled to run the business,” Shing says.
Once founders find angel investors who they feel are right for them, they may move on to more formal discussions about the particulars of the deal. Though much advice has been given about this stage, Shing feels there is really no such thing as “best terms” for an angel round.
“Both parties may seem to be on opposite sides at first, but in the end, they are aligned for a long time. So when negotiating terms, we should bear in mind that the terms are fair both ways. Valuation usually takes its cue from comparables modified by team and execution metrics,” he says.
For other details, Shing advises that founders look at common benchmarks. “Other deal terms like liquidity preferences and shareholder reserved matters have norms for each stage,” he says, noting that so long as the terms don’t deviate grossly from these norms, it should not be a problem for either party.
Even after a founder is able to successfully raise his angel round, Shing advises that entrepreneurs leverage them in building their start-up.
“Use angels for their network and experience. In your monthly or quarterly reports, focus a segment on what you need from investors. And for specific needs, call your investor up and ask directly,” he says.
In addition, Shing would also like to see more businessmen consider the world of start-up and tech investing. To him, they must first understand the risk of this space.
“Angel investing is a high-risk activity that frequently gives a binary outcome. Meaning you either make a few times back or make nothing on an investment. Your money is also tied up for many years and is illiquid,” he says.
Shing, for his part, has not had any exits yet but has had 8 uprounds on his 17 investments. “All the VC funds are also up on the money,” he shares.
For others who also want to become angel investors, Shing recommends building a portfolio of a minimum 25 investments over a 4 to 5 year period.
“In addition, you need to figure out the correct bite size for you, the right strategy to pursue, and where possible to follow other VC or more savvy angel investors, especially in the initial stages. In ASEAN, you can join groups like AngelCentral which is an angel community which has invested over $2 million in over 13 start-ups this year to date,” he says.
Shing acknowledges that many angels invest for non-financial rewards like learning, giving back to the ecosystem, and living like an entrepreneur minus the day-to-day grind. “If you are a pure returns type of person, perhaps investing in a seed stage VC fund is a better choice for you,” he says.