In 2004, Peter Thiel put $500,000 in Facebook as an angel investor. When he cashed in his shares in 2012, he got over $1 Billion.
In 2000, Masayoshi Son put $20 Million in Alibaba. He is estimated to get over $80 Billion when he cashes in his 34% stock.
These stories are the stuff of legends now. Angels betting on Unicorns is the flavor of the season in the whole equities investment market.
We have multiple success tales of upstarts in India turning into highly valuable firms and rewarding their angel investors handsomely. MakeMyTrip, Ola Cabs, Flipkart, and Druva Software are probably the best examples of this.
These success stories have led to many people seriously considering investing in startups as the best way to multiply their money. Maybe you are thinking about it too. If that is indeed the case, it brings us, quite literally, to the billion-dollar question:
To answer this, let’s take a closer look at what angel investors are faced with.
The angel investor typically invests a small sum at a very early stage of the company and waits for the company to grow big. Every profitable investment increases the capital by 30 to 100 times, but every unsuccessful one yields a fat zero. In order to ensure that at least one or two of the companies receive the substantial profits, the angel investor must participate in many businesses.
To top that, unlike publicly listed companies, startup stock is not liquid. You can’t sell it whenever you want. It often takes 4–7 years to cash out from a successful startup investment. One needs to have a lot of money and a lot of patience to play this game.
Take Y Combinator, for example. Having made investments in 940 businesses during the last ten years, they are currently among the wealthiest investors. With the money to wager on almost a thousand startups, they were patient enough to wait for businesses such as InstaCart, Dropbox, Airbnb, Zenefits, and Stripe to justify their efforts.
Y Combinator’s enviable early-stage success (yes, 5% hit rate is enviable) is down to its people. Before starting as investors, the founders were entrepreneurs themselves.
They possess the knowledge, expertise, connections, and intelligence to respond to inquiries such as these:
This is compared to an individual investor, which is most likely who you will be. More often than not, an individual investor has to depend on one variable alone: the quality of the team. Maybe they went to school together or have heard great things about the founders of their friends.
Assessing a startup investment is both an art and science and it’s something that one becomes better at only with experience.
Let’s run the numbers for you.
You must invest at least 5 lakh rupees in any company in order to be considered a worthwhile investment. To find that one unicorn, you will need to acquire at least 20 startups, assuming you can equal Y Combinator's success rate of 5%. This implies that you must invest a minimum of one crore.
Startup investment may be a smart approach for you if you are prepared to invest that much money over the following few years. Furthermore, it is preferable to make those initial investments with knowledgeable startup investors even if you have that much money.
In any case, until you reach a life-stage where you can build a portfolio of startups, you are better off investing in other equity asset classes, as a top-rated mutual fund.
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