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Seed Capital From Angel Investors: Anurag (Anu) Nigam, President, Sand Hill Angels (Part 4)

Posted on Saturday, Nov 20th 2010

By guest authors Irina Patterson and Candice Arnold

Irina: Do you think about the return you would like to have over a certain period?

Anu: We’re different from a VC firm in that we don’t have IRR [internal return on investment], and we don’t have LPs [limited partners]. It’s our own money.

So, I think we look at it in terms of x return upon x money. I think we’re just looking for good companies that have good teams and big enough markets. We’re putting money in so early, and there are so many factors, it’s hard to know what’s going to make the company successful.

Like my own company, Sona, which we did before. It was a dating site that became a social network. A lot of angel investing needs to be treated differently. [I believe] you should put a little money in a lot of deals because you just don’t know what’s going to end up happening over the lifetime of the company.

I think I’m looking for a good return. You know, it’s so hard to know what company’s going to go where. The company Hi5 at one point, we raised a big chunk of money from a VC fund, and then it had a down round, so a lot of bad things happen, too.

You can’t predict and know what’s going to happen. I will say this, the exits that fail usually fail within a year and a half. The things that do well can take seven to ten years. So, it’s a long, long time to say what’s going to happen.

Irina: At what stage of a business’s development do you prefer to invest?

Anu: It’s usually early, seed stage, pre-money. We have done later stage bridge notes and later stage rounds. For us, it all varies. We can invest in whatever. It’s an angel group. There’s no restriction. It’s just whatever the group of members feels like investing in.

Irina: Do you invest in ideas on paper?

Anu: Yes. We’ve invested in an idea. These are smart people. They’ve done some sort of consulting for us. But, yeah, it’s just an idea.

Irina: What size do you prefer for the total available market?

Anu: I think it depends on any business and how successful you can be. For us, it’s just factors that play in when we compare deals, and then pricing it right.

If it’s a $100 million market, but the pre-money is $100,000 and we put in $100,000 and get half the company, that’s good. Here’s $10 million. You got a good return on your money. So, it depends on a lot of factors, and if they can deliver and execute in that $10 million market, that’s a nice exit.

Irina: Some angels tell me they don’t invest in small, niche markets.

Anu: I think we have. We do a lot of biotech deals that are, as you say, niche, very, very niche. I think a lot of my personal opinion – I can’t say it for the whole group – is that a lot of angel deals are now becoming R&D-type investments that the big companies will gobble up later. So, if you want to be in a big enough space, get something that can be valued for a certain amount of money that all the investors are happy with.

Irina: So, you don’t mind niche markets, like $20 million market, if it’s interesting market, you would invest?

Anu: Yeah. I think the question of the $20 million or $30 million market is barrier to entry. If it’s consumer Internet, and there’s just no barrier, it’s hard to know [about] a $20 million or $30 million market. I think it’s hard for any angel to quantify the market because the market changes so much.

I think in the biotech, it’s much more apt to say that it’s a niche kind of thing, and this is how big it can get, and this is how many people can have this disease, and this is how much Medicare can pay for . . .  a lot more tangible data can come in. So, niche markets can be quantifiable and, therefore, a niche is still pretty good.

Irina: Do you require entrepreneurs to have past business experience?

Anu: They don’t [have to], but usually it’s good to have somebody who’s had some business experience. There are a lot of factors that go into it. I think a lot of investors look at do they like the person, [are they] getting along with her, do they trust her, things like that. Instinct.

This segment is part 4 in the series : Seed Capital From Angel Investors: Anurag (Anu) Nigam, President, Sand Hill Angels
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