This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on May 30 – June 5, 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. 

One way of choosing which companies to fund is looking at the sectors in which you have extensive knowledge and expertise, says Sivapalan. “That way, with your experience, skills and network, you can guide the young entrepreneurs and increase their chances of success. For example, I have been in the technology sector for 16 years now. I invest in tech companies because I understand technology.”

Yoong does not only invest in companies in which he has expertise but also looks out for those that could potentially disrupt his business. He says this is because he has seen many “old economy” companies crumble with the emergence of digital companies and does not want to suffer the same fate. 

“There are old economy companies that tried and failed to build digital businesses because their way of thinking was not disruptive. They were stuck in their corporate rigidity and short-term protective mindset, which is very different from the start-up mentality. I actually see a much larger disruption in the next 10 years, when everything will be disrupted with the internet and technology. If I am not involved, I will be left behind,” says Yoong.

“One of the companies I invested in is called InvolveAsia, which was previously known as Shopstylers, and it just went through a Series A funding. It is an e-commerce site that connects merchants and publishers, and may disrupt CtrlShift in the future.”

Yoong does not seek out investment deals at pitching sessions. Rather, he is often approached on social networking platforms, such as Linkedin, and gets referrals from other venture capitalists. Ideally, he says, he looks out for start-up entrepreneurs who have some experience in the industry they are trying to disrupt. 

“From my experience, there are a lot of people who think they want to do all kinds of things to disrupt. But they really have no idea what the challenges are, what the industry is like, what kind of mindset the people have, how difficult it is to scale and motivate a team, how to create a leader, how to be a manager and how to execute things. Experience helps a lot,” says Yoong.

He also looks for founders who have great determination, which is a very critical aspect of building successful start-up. “The greatest trait a founder should have is grit. Founding a start-up is certainly not an easy route and I think a large part of failure comes from not having enough grit as an entrepreneur,” he says.

“I am also a big believer of passion, so I don’t believe in the ‘Rocket Internet’ model where the founders take a good idea, build a process around it and scale it up for the sake of money. It works — you can get a huge return — but for them to be successful, the timing is strict and the strategy and execution need to be perfect. That is why I am more in favour of companies that try to make a difference rather than these kinds of business models.”

Yoong also gives extra points to entrepreneurs who have failed in the past. He says there are some entrepreneurs who are very egoistic and arrogant simply because they have not failed. This causes them to be less open to learning and limits their potential when building a network. 

Angel investors should also look for start-up founders who have had a good education. Yoong says this is something many people often discount. “If the entrepreneurs come from good universities such as Harvard, Stanford, INSEAD, Cambridge or Oxford, there is no guarantee that they will be able to build a successful start-up, but it gives them a very strong foundation,” he adds. 

“Although I am not educated — I don’t have a degree myself — I do believe in entrepreneurs who have a good foundation when it comes to education. It is not a big factor, but it does help. And if there are these guys, I do pay a bit more attention.” 

In evaluating a start-up’s business model, Yoong says the angel investors should make use of their own experience and determine whether the business model will work. He adds that if an angel investor is not playing an active role in guiding the invested companies, he should not be investing in them in the first place. 

“A lot of people are becoming angel investors simply because they believe the digital economy is growing and they want to own a stake. When I invest, I don’t think about the financial returns. I think about how I can help these companies become the next big thing. In fact, I won’t invest in a start-up if I cannot move the needle for them. If you cannot make these start-ups leverage you, then don’t invest — it is too high a risk!”

 

Angel investing basics 

Angel investors are commonly described as high-net-worth individuals who invest their personal disposable income in start-ups or very early stage businesses, usually in exchange for equity (also known as seed funding). Angel investors not only provide funds to a start-up but also share their knowledge, experience and networks to grow the businesses they have invested in. 

The term ‘angel’ originates from Broadway theatres where it was used to describe wealthy individuals who fund theatrical productions to prevent them from shutting down. The term was later used by William Wetzel, a professor at the University of New Hampshire and founder of the Center for Venture Research, to describe investors who supported entrepreneurs with seed capital in his study in 1978. 

Angel investors are not to be confused with venture capitalists (VC). VCs are usually companies or businesses rather than an individual, and invest in more established businesses at the Series A funding stage (the first round of significant financing for a new business venture after seed capital).

Compared with angel investors, VCs tend to provide a significantly higher amount of funding — some going as high as RM50 million. The VC usually also requires a seat on the company’s board of directors.

 

MBAN initiatives

To qualify for the Malaysian Business Angel Network’s (MBAN) individual angel investor membership, one has to be a tax resident of Malaysia and must be either a high-net-worth individual with a total wealth or net assets of RM3 million and above (or equivalent in foreign currencies) or high-income earners with a total gross annual income of not less than RM180,000, or a combined total annual income of RM250,000 jointly with one’s spouse, in the preceding 12 months.

In order to qualify for the tax exemption, the investor must first and foremost obtain business angel accreditation from MBAN. Once accredited, the business angel should make sure the investments are only made in companies that have received qualifications from the Angel Tax Incentive Office — the administrator of the tax incentive. The business angel must not have an immediate family connection with the investee company. 

Apart from the Angel Tax Incentive and monthly curated pitching sessions, MBAN offers many initiatives for its investors, including angel education programmes for potential and existing business angels. Sivapalan says the programmes provide business angels with training in how to invest, look for deals and conduct due diligence and valuations. 

“It is open for all. So, if you are interested in becoming an angel investor, you can sign up for the programmes we offer. We have just had our first ‘deep dive programme’, where we go deep into certain aspects of angel investing. We spent the whole morning talking about term sheets,” he elaborates. 

MBAN works closely with equity crowdfunding (ECF) operators, which are an eligible avenue for the Angel Tax Incentive. ECF operators are allowed to offer the shares available on their platform to MBAN’s accredited business angels as their definition of qualified investor is in line with the requirements of both MBAN and the Securities Commission Malaysia. Business angels can invest a minimum of RM50,000 per investment or up to RM500,000 per year in total. 

MBAN is looking at setting up an alliance of angel organisations in the region. It is already in discussions with groups in Indonesia, the Philippines and Vietnam, and soon with Thailand and Cambodia. 

“We want to encourage cross-border investments. It is still new and will take time, but we already have the network. They came to the angel summit we hosted and showed a lot of interest,” says Sivapalan.