‘Understand the best practices of angels’

Keiretsu Capital is an affiliate of Keiretsu Forum, a leading global angel network headquartered in the US. The Keiretsu Forum has three chapters in India – Chennai, Bengaluru and Mumbai – helping Indian angel investors invest in start-ups in the US and in India. Keiretsu Capital has about $10 million under management, which it hopes to go up to $20 million by the year-end. In this recent interview, Matthew Le Merle, Managing Partner, Keiretsu Capital, talks of angel investing and the opportunities for India. Edited excerpts:

What would be your advice to angel investors here?

Take your time, read the information that exists about the best practices of angels. There are best practices that differentiate between the most and the least successful investors. Understand the best practices. Make sure whatever angel group you are part of demonstrates these best practices. Take your time to develop your investment thesis. Don’t just invest across things that appear exciting. Know why you are investing and then diversify. Make lots of little bets. Don’t put all your eggs in one basket. Don’t put too much money into one company.

Say to yourself, if over time, maybe 5-10 years, I am going to have a portfolio of perhaps 40 companies, then how many should I make per year and do the mathematics on your wealth and the proportion of it you are prepared to put in Indian start-ups. Divide it by that number and that is sort of your investment size. It may be a small amount, which is fine. But don’t get carried away and invest so much in one company that you can’t diversify over time.

You say investors should, over time, have a portfolio of about 45 companies across sectors. Wouldn’t the investors have very little time to focus on each of their portfolio companies?

One of the reasons most angels end up not having a large, diversified portfolio is they don’t have the time to be an active investor in that many companies. Statistically, you get closer to having a high probability of getting the overall return the more companies you invest in. At about 25 companies, you are at about 85 per cent probability of getting the average return and by the time you get to 40 companies, you are at about 95 per cent of the way there statistically. If you are backing only 5-10 companies, you have a low probability of getting the return. It is important because angel investing is highly skewed. Most of our returns come from the companies that really succeed. If you don’t get any of those companies in your investment portfolio, you can end up with an unfortunate loss of capital and a poor return.

That sets up a paradox, which is you want to invest in many but the time it takes tends to make you invest in small number. The way to resolve the paradox is to find other people who do the things you know need to be done, in terms of the best practices and then trust them and vice versa, such that you sometimes invest in their companies and they invest in yours. Sometimes you are leading and sometimes you are following, but in every case there are angels backing the company who demonstrate the best practices that make angels successful in their investments.

Is that where groups like the Keiretsu come into play?

Precisely. There are broadly are four reasons to join a top tier angel group. One, you simply see more deal flow. Many of those will have been exhaustively called over by other angels, who are backing their own money. Two, we do collaborative due diligence and it means sometimes you are contributing your expertise, sometimes you are more passive and others are bringing their expertise to bear. The third is we get to negotiate better terms and conditions.

The final one, and this may actually be the second most important one after due diligence, is that once Keiretsu Forum has put money into a company, it is understood that any Keiretsu Forum member anywhere will do their best to help that company. In so doing you are helping your fellow members, even if you are not an investor yourself.

How much time would an angel investor spend with a portfolio company?

We know from academic research that when angels meet with the company and help the company at least two times per month, they multiply by three the return they are likely to get. Conversely, if angels no longer speak to the company after they give the money, they typically will get just better than a 1x return of their capital. However, if they are very active with the company, they will get more than a 3x return on their capital. Because of that, members do tend to spend a lot of time.

Some angels prefer to be passive and leave the heavy lifting to other members of the community. Some prefer to spend almost all of their time working with the companies. Some members take board seats or advisory board seats, in which case they have a fiduciary responsibility to help the company. Other members will not take a board seat and prefer to be an investor only.

What is your experience of the Keiretsu Forum chapters in India?

India understands that the digital economy is the future and angel investing plays a critical role; a role that is not well understood anywhere in the world. Angels tend to hide their light under a bushel and it is important that we expose the secrets of how start-up investing really works so that every country can participate more in the digital economy.

What has been Keiretsu Forum’s success rate globally?

Keiretsu Forum has been consistent with the angel statistics overall. Those are: angels investing in groups demonstrating the best practices of angel investment average somewhere in the mid-20 per cent annualised internal rate of return. Those returns come in the following way: 40 per cent or so of the companies return no capital at all; 10 per cent of the companies give you a 10x; and, the other 50 per cent, are somewhere between nothing and 10x, but they are skewed towards 1-3x. So, 75 per cent of the capital angels get back, come from the highly successful, relatively rare outcomes. That is true for Keiretsu Forum as well.

Is there a chance of India having a Keiretsu Capital?

We had decided about 18 months ago to create some ways for members to get even more diversification and more access to a large portfolio of angel deals without needing to select every company themselves. And that is exactly what the Keiretsu Capital co-investment funds allow the members to accomplish. The first two funds have been very US centric. It is our hope that as Keiretsu Forum grows in India, we will create some sort of a fund that focuses specifically on Indian companies. We don’t plan to do it this year.

Is there an opportunity for Keiretsu Forum members in India to invest in Keiretsu Capital?

Absolutely. The funds are open not just to our members but to others as well. So any accredited investor in India can put money into the Keiretsu Capital funds. We have seven or eight Indian investors. For an Indian investor, it is not just about diversification but also the access. If an Indian investor wants to put money into one of the Keiretsu Capital funds, they will be putting investment dollars into a portfolio of US technology companies backed by angels. And if there are ways to cooperate with those companies to bring them to Asia or to India that is another possibility.

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