I am an ‘ANGEL INVESTOR’ too..Are crowdfunding platforms really democratizing angel investing?
I have written in the past about how massive amounts of capital are being deployed via angel investing, which has led to capital becoming a commodity. Apart from the financial aspect where people want to grow their money via the start up route, angel investing also is developing into a social fad. People want to appear cool and brag with that tag of ‘Angel Investor’.
This excessive capital has led to soaring valuations which is quite expected, but it the rise of crowdfunding platforms in the angel investing space that is turning out to be both exciting and disturbing to say the least.
These platforms true to their crowdfunding nature serve as a marketplace: on one end they allow startups to list themselves and raise funds and on the other end they allow individuals to invest money with minimum investment sizes of as low as INR 5000 ($67).
On the surface of it, they are democratizing angel investing and allowing individuals to get a chance at investing for outstanding returns. But you dig in deeper and you will start to realize that while the intention of the platform may be right, ground level realities reflect a little otherwise.
I am going to discuss this from both the sides — the people investing money on startups listed on these platforms and the startups themselves. This will give us a better idea as to why things might be a little wrong here.
Let’s look at the investors first.
Because these platforms allow you to invest such small amounts, you now have investors who are mostly classified as retail investors in the stock market space. While making money is the primary goal, they are also investing money in this space to appear cool (read: Angel Investors).
They have no clue about how to go about investing in this space and are influenced by media stories and accounts of people who have made outlandish returns via this route. The investor profile also reflects and is similar to the investor profile in the crypto space, young people investing money without any idea with a goal to make a quick buck and appear col alongside.
Let me explain more using an example:
A young person making a salary of INR 50000 per month comes across multiple stories from his friends in Bangalore who have invested money into startups at a very early stage and have made massive amounts of money. He also notices that these guys have started gaining some more respect in their social circles as the cool startup guys and angel investors. He is further fuelled by similar stories he had consumed over other media.
He soon comes across a platform which allows him to invest as low as INR 5000 in startups. He finds a firm which interests him. They are raising INR 30 lakhs ($40,000) at a valuation of INR 14 crores ($2 million) and the minimum investment is INR 5000 ($67). He does some research on whatever information is provided by the startup raising funds; he completely misses the disclaimer of the platform at the end which states that they are not responsible for verifying the information provided by the startup.
How he evaluates it is completely dependent on his understanding of how this model works, which let’s just face it would be bare minimum. Even if the company is making money, he doesn’t realize that his amount accounts for nothing and the risks are far greater than the best rewards that he can get. In either scenario, he puts in INR 5000 for a 0.000035% stake and quickly updates his LinkedIn profile as ‘Angel Investor’.
He has also heard that you need to make atleast 10 bets and 1 of them will return your money. He does make those 10 bets over a period of time. At the end, when he has put in INR 50000, he kind of forgets about it thinking that some day he will get his returns. Over a period of time, he realizes that multiple companies he put money in have shut shop. He counts it as 1 month’s salary and lets it go forgetting about the money lost in the process.
Now let’s look at the startups who are listing themselves on these platforms:
Dodgy startups: While I am not saying that everyone is upto some mischief, there were multiple dodgy deals that I came across, an example being a financial content curator who valued themselves at $2 million on the back of some early 100s of subscriptions via Whatsapp for INR 1500 per annum. Their supporting numbers included impressions on social platforms, yes IMPRESSIONS!! They raised 200% of their demand…
Soaring valuations with less dilution: Also, one thing which was common was the ridiculously small amount of equity being offloaded at such valuations. It seemed more like free money for people wanting to test out ideas. Imagine raising INR 30 lakhs at a 15 cr valuation with hardly any revenues. While these metrics keep on changing, industry wide people do raise anywhere between INR 30–50 lakhs by giving out equity anywhere between 7–12%. These numbers do vary when you have seasoned entrepreneurs and hot tech spaces, but here you mostly have first time founders in non-tech spaces and hardly any experience valuing themselves in such a fashion.
Lifestyle businesses parading around as tech startups: Another funny fact was normal D2C brands adding tech to the sector they function in, a very common one being food tech. There is no tech at all, they are simply food D2C brands who only leverage tech platforms like Amazon or Shopify to sell. I doubt they even use tools for running their enterprises for that matter.
Naive investors getting duped:
As explained earlier, these investors are mostly people who have no knowledge of how returns are generated in this space. Also, the amount they put in is so small, they don’t really care or do much about it when it is lost in the process. To add on, the dilution is so small that even if any of their investments perform, they will hardly gain anything out of it. The risk will always remain more than the rewards.
I saw the naivety in a couple of the AMA sessions between founders and potential investors that these platforms organize. Many founders there simply had no answers to even the basic questions.
Sample: One founder of a healthy nutrition food startup is asked about scaling from 1 product to others and the probability of the company doing that in the near future. The founder responds: ‘We already have the formula ready for 1 product, now we simply need to scale and introduce new products’. I am no food scientist, but I know one thing for sure; that you need to work on food formulas and their ingredients for each specific one of them, particularly so when you are touting them to be healthy and beneficial products. The randomness of responses was appalling.
Free money to test out ideas:
When you dilute not more than 1–2% for a significant amount and without a solid business, you are erring yourself on the wrong side (this is my view). Naive investors get sucked into believing that they will generate outsized returns but more often than not, this money allows these startups to test out their ideas without any loss of pay and without having to shell cash from their pockets. If they fail, no one notices and if they do succeed the equity dilution is next to nothing. In the end, it is free money to test out ideas at the expense of naive investors.
As a result, it is becoming more a network for dodgy deals and naive investors with free money floating around for ideas which might suit more of a lifestyle business.