Seed Capital From Angel Investors: Venktesh Shukla, Chair, TiE Angels (Part 3)

By guest authors Irina Patterson and Candice Arnold

Irina: Would you consider investing in a $20 million niche market?

Venktesh: Yes. If it’s a $20 million market and somebody owns a decent chunk of the company and the valuation is, within two years of investing in it, let’s say,  $4 million. The company gets acquired for $20 million, that’s a very good exit for angels.

Irina: What would be your advice to entrepreneurs on how they can improve their chances of success?

Venktesh: I think the most critical advice I could give to entrepreneurs is before going to anyone for investment, I think it’s worthwhile for them to figure out if there is any traction in the market. They don’t have to have a product, but they need to have an idea and they need to go to target customers and get their feedback. Go through that process a number of times to really figure out what works, what is likely to work, what it is that people are willing to pay for and how much.

Irina: Do you look for specific character traits in the entrepreneurs?

Venktesh: I think in general, people look for credibility in the team. Credibility comes either from doing similar things in the past or from having accomplished something substantial in the past. So, credibility is important.

Irina: How about people right out of school?

Venktesh: People out of school? I think we looked at one company that almost got picked. A lot of people were interested in that, and they were straight out of Stanford. An exciting idea, and some of the angels started working with them as mentors to refine their business plan.

Irina: Do you have any sector preference?

Venktesh: Since it’s an angel investor group, things that require huge investments, like drug discovery or solar manufacturing, those kinds of things are out of bounds. I think typically we look for low-capital areas, which are software, mobile, and even in the clean tech low-capital space, health care IT, and entertainment. Those things are finding traction. But if somebody comes with a business plan and says, “I would need $20 million to get anywhere,” that’s not going to be a good fit for angel investment.

Irina: What is your usual type of investment?

Venktesh: Preferred shares.

Irina: Would you consider any other type of investment, like convertible debt?

Venktesh: In some cases, I think that might be the way to go. Especially if the company looks well situated to get VC funding soon. Then it might be an acceptable alternative.

Irina: Do you have an exit strategy preference?

Venktesh: Well, I think for angels, the preference is pretty clear cut. If the company gets acquired in two or three years for a decent, 3x to 4x return, that’s very exciting.

Irina: Do you think IPO is possible?

Venktesh: Well, I think if it happens, that’s very, very attractive, but doing an IPO typically requires a large amount of capital.

Irina: Did you do angel investing before this group?

Venktesh: Yes, I did, without the benefit of the process and the structure and without the benefit of the collective wisdom of others. I lost a lot of money.

Irina: You did it on your own without any network?

Venktesh: Yes. Based on who I know. Typically, that’s the wrong reason to invest, but that’s how investments got made.

Irina: Can you share some lessons that you learned from that experience?

Venktesh: Yes. The most important lesson for me is that the collective wisdom of four or five people looking at [a company], who have different backgrounds, is infinitely better than one person looking at it and making a decision. That is a central conclusion that I came to.

Irina: What do you think angels could do to increase their chances of success?

Venktesh: I don’t know if there is any recipe for how angels could improve their odds because fundamentally, when you’re betting on innovation, when you’re betting on something new, there’s risk. I don’t know how to improve the odds. It’s very, very difficult.

I think the reason I started this group is because of the lesson that I learned, that it’s very easy for one individual to fall in love with the team or with the technology or the market. But if there is a group of people looking at it, the emotional component of that is minimized. And that improves the odds significantly.

This segment is part 3 in the series : Seed Capital From Angel Investors: Venktesh Shukla, Chair, TiE Angels
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