Questionnaire – Risk Assessment in Angel Investing

Is this the right time for investment? What if the business takes off a little later? Would it have been successful a little earlier even before the necessary ecosystem fully matured?

The success story of Airbnb is the right example for launching the business at the right time. By the time it was launched, the ecosystem already developed which includes Social Media, Smartphones, Electronic Payment mechanisms etc. which enabled users to use it’s mobile app and book accommodation. Would it have succeeded a few years earlier? It is unlikely.

Is there any proprietary technology used in the product or service? Is a Patent filed? Does the technology have a competitive advantage? Is your technology stepping on the toes of big guys?

If the patent is not filed for proprietary technology, it will be vulnerable to replication by other market players and will not create a strong moat. If your technology is overlapping with big players in the industry, it is going to be a big risk. If you are lucky, they will gobble you and let you grow, else they will use their power to wear you out. YouTube and Instagram were acquired by Google and Facebook, yet they grew. But Netscape faced Microsoft wrath and lost its dominant market position. Angel investing is not about investing in Technology (AI, Metaverse, AR, VR, IOT etc.), but investing in business that will utilize the technology to solve specific real world-problems.

How does the business make money today? How it will make money tomorrow? How are unit economics? Who pays? These are key questions that are worth asking as a part of your evaluation.

By asking “Who Pays”, you get clarity about the business and its processes. B2C companies where consumers pay for goods and services are very common. But there are lots more business models like:

• Advertiser pays and services are free for consumers, where monetization is through advertisements and Leads(Facebook and Google)
• Users pays for cloud based software as in SaaS based players(Zoho and Freshdesk)
• Consumer pays but is subsidized by Investors (Flipkart and Ola)
• Companies pay which are enterprise businesses(InMobi)
• Consumers and customers are different like Pharmaceuticals, where doctors are customers but patients are consumers

Will the market adopt your product or service and not that of competition? What are the substitutes? Who is the competition? What are the entry barriers?

No matter how smart your idea, without market adoption, it is meaningless. Ventures like BLINGE (Marketplace for fashion cloth rentals for one time use) have failed because they underestimated the time taken to change habits of customers and get the people to switch to fashion rentals. It struggled to generate the demand.The unit economics were unviable, when compared to competitors i.e. Mainstream e-commerce apparel platforms.

Is the market size large enough or fast enough to offer meaningful returns in the future? Will it be able to attract investors assuming it is successful? Will it offer an exit through future funding rounds, merger or acquisition? Will it have to grow large enough to go for an IPO? How long will it take?

E2E NETWORKS offers Cloud based infrastructure to enterprises. It had a huge growing market, yet it did not receive favorable response from Venture Capitalists as it is perceived to be taking on the likes of Microsoft Azure, Amazon AWS and Google Cloud. Eventually, it went for IPO and investors exited with modest gains. Large market size does not necessarily mean an attractive opportunity.

Is the company operating in a business where regulations can affect its fortunes? Is it facing any litigation? Are there any lawsuits or charge sheets against the promoters or key management persons?

Many businesses take off with a passion to solve a particular problem, but not aware of the underlying regulatory constraints. Noncompliance to Regulations can affect the product success and expansion into other countries as well. Startups in Bio Tech, Consumer Healthcare space usually have to comply with very stringent regulations stipulated by both domestic and international authorized bodies.

How much money is required to achieve a venture’s goals? Is there sufficient money for the desired pace of growth? How are the unit economies of the business? How quickly and easily the company raises capital through debt, equity or other way to ensure there is no disruption in business?

STAYZILLA is perished because of its weak financials. Burning too much cash to grow at a fast pace in anticipation of secured funding leads to a disaster. Companies with strong cash management can eliminate survival risks and grow better than peers. Amazon is a good example of strong cash management capabilities.

A part of financing risk is capital structure risk. Can existing shareholders structure accommodate more capital? Does it have enough room to compensate employees today and tomorrow? A growing organization needs to have the ability to attract, retain and nourish talent. If the capital structure is constrained, it will hurt rapid and sustainable growth

Angels, like all investors, have biases which affect their investment decisions. When a few famous names ( IAN, Mumbai Angels etc..) have signed up for a given startup, they will be biased to invest in the venture without meeting promoters and without doing due diligence. Recognizing these biases and consciously factoring them in decision making helps.

For an early venture, the risk is linked to the promoter and his team. Does the team have required skills, capabilities and passion to get things done? Are they open to finding others with complementary skills? Do they have it in the team to attract and retain talent? In case of multiple promoters, are there any differences between promoters? All these factors will impact the execution.