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Angel investments as an asset class (Pt 2)

Angel investments as an asset class (Pt 2)

Published 13 Jun, 2016

Angel investments are an alternative vehicle to consider when traditional assets are delivering less-than-satisfactory returns. But there are high risks associated with such investments. Industry players give some pointers on how to minimise these risks and what to look for when evaluating start-ups. 

Investing in the future

There has been tremendous growth in angel investing all around the world. According to the University of New Hampshire’s Center for Venture Research, angel investments in the US alone reached US$24.6 billion last year, from US$20.1 billion in 2010. Some 71,110 ventures received angel funding last year compared with 61,900 in 2010.

Meanwhile, early-stage investment platform Go Beyond Investing, which represents investors from 25 countries, says in a report that the amount invested by its investors in 11 countries, mainly in Europe, increased to CHF2.8 million in 2014 from CHF2.4 million the previous year. 

Closer to home, angel investing has grown exponentially in India. Investments hit the US$300 million mark in December last year, from US$196 million in 2014, according to India-based investment research platform VCCEdge. 

Angel investing depends heavily on the entrepreneurial ecosystem. Its development is mainly driven by the growth rate of successful start-ups and the exit returns (profit made when a company is acquired by a third party or goes public). 

With the increasing number of high technology start-ups in Malaysia, angel investing is also picking up here. Sivapalan says he has seen a significant increase in participation at MBAN’s monthly pitching sessions since they kicked off in June last year.

The Malaysian angel investing scene has come a long way and is poised to develop further. Today, it is structurally one of the most advanced in Southeast Asia, he says.

“At MBAN’s summit last year, angels from the Philippines, Indonesia, Vietnam and Myanmar told us we were way ahead of them. They didn’t have any governing organisations, training programmes or curated pitching sessions on a regular basis. They are not government supported. [Currently], we are the only country in Southeast Asia to offer a tax incentive to business angels. While Singapore has provided some incentives [for its business angels], it is not as extensive as ours,” says Sivapalan. 

With the growing number of companies disrupting different industries globally, investors — especially those who are already successful in their own right — should seriously consider becoming angel investors themselves to be part of the change and invest in the future of businesses. 

“The future is changing rapidly and angels are playing a very big role in this change. If you look at the telecommunications industry, it used to make tons of money out of the short messaging service (SMS). But I think the situation has changed with the existence of free social media apps such as WhatsApp and WeChat,” says Sivapalan.

“These apps were created by entrepreneurs and somebody funded them. These funders are angels and venture capitalists. This happens all around the world, including Malaysia. These companies are disrupting economies and businesses, and angels have the opportunity to invest in them and be part of the disruption. Isn’t that exciting?”

There is a large angel investing opportunity in Malaysia, says Sivapalan. This is due to the fact that the country has produced some of the most successful tech companies in Southeast Asia. JobStreet Corp Bhd, for example, was acquired for RM2 billion and iProperty for RM2.6 billion. MyTeksi (Grab), worth US$1.6 billion, is the most valuable tech company in the region. 

“The advantage that Singapore has is that investors feel more comfortable setting up there because it is a financial sector with a very open economy. A lot of them, however, are coming to Malaysia to look for deals and investing in Malaysian companies. So why shouldn’t Malaysians invest in our local companies?” he points out.

Sivapalan says the country’s entrepreneurial ecosystem has done very well in the last 15 years, and he anticipates more angel activities taking place in the near future. He adds that once MBAN members start seeing good exits within the next five years, there will be an avalanche of investors who want to become business angels. 

“Being a business angel is energising and it is such an exciting journey to be on. When a company is just starting up, they don’t need US$2 million or US$5 million. They only need RM100,000 to RM500,000. These entrepreneurs also need people with certain skills, experience and mentorship. Who are the best people to do this? Us, the business angels.”


How to evaluate companies

There is no typical initial investment amount when it comes to angel investing as it is largely dependent on factors such as the type of start-up, how quickly it is able to scale and how soon it can be acquired by another company. Sivapalan says the amount can be between RM30,000 and RM500,000 per company, while Yoong says some business angels may even invest up to RM2 million at the start if they feel the company has a huge potential for exit returns. 

The potential returns from angel investing can be enormous. Facebook’s first big investor Peter Thiel made more than US$1 billion selling most of his stake in the company in 2012 — about 2,000 times his initial investment of US$500,000. Sivapalan says it is possible for angel investors in Malaysia to earn up to 30 times their investment in local start-ups within a three to five-year time frame. 

Ng, who is now a venture capitalist, explains that while his portfolio of investments made tremendous profit in the past, it is still only on paper until the companies are acquired. “Back when I was an angel investor, I invested in seven companies. One out of seven seems to be doing really well while another seems to be doing alright. I don’t think the rest are going to make me any money. In fact, I think they are not going to do well at all,” he says.

“Even for the first company, right now [any returns are] still on paper until the company gets acquired. Then, it is going to return cash. So there is still a chance I may lose all my money. But if you look at the paper valuation, my portfolio is probably up by 40 times the money [I invested]. But again, until the paper converts into cash, it is basically zero.”

When determining the amount of investment an angel should provide a start-up, Ng says a business angel needs to puts in an amount that should be able to get a return of three times for the investor in the next round. 

“Your entry price [initial investment] must be low enough, so your money takes up a big enough stake. You need to give the company enough money [for the stake you are requesting] to hit a meaningful milestone [such as cash flow breakeven or growth to raise another round of money],” he adds.

“The earliest investors should always let the entrepreneur own a lot of shares — as much as possible because his shareholding is going to be pared down by other investors over time. If you give the company too little money, it will run out of fuel before it can fly. If you take too much shares, then you prevent new investors from joining the investment, in fear that the founder will not be incentivised to keep growing the business and eventually leave. Ideally, you find a win-win that brings the next round of investors to value the company three times more than the valuation you paid for. It is a good benchmark.”


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