Angel Investing in Singapore and SEA [2019]

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Angels exist among us.

You could be one – an angel to a local startup.

And you could be rewarded if the startup becomes big.

But should you become an angel investor?

  • Are there enough options for you?
  • What are the risks you need to bear?
  • And, would you need to spend time nurturing your startups?

If you can set aside $500,000 for startup investing over the next 5-10 years and want to support local entrepreneurs, read this article because we answer all the questions above and more below!

Unlike our usual guide format, this guide is structured like a Q&A answering the frequently asked questions about Angel Investing in Singapore:

A Quick Note of Acknowledgement

Angel Investing is still a relatively new form of investing in Singapore and South East Asia. We have to admit that we are no experts in Angel Investing, nor do we have related experience.

As retail investors, we are more competent in evaluating the value of established businesses or picking companies that are more likely to bring us profit.

We would like to take this opportunity to thank full-time Angel Investors, Mr Lim Der Shing & Huang Shao Ning who together, manage an active angel group called AngelCentral for their help in producing this guide.

The Fundamentals of Angel Investing

What is Angel Investing?

Angel Investing is the act of investing in startups usually at an early stage with little to no paying customers.

Angel investors are usually interested in startup investments because it allows them to experience entrepreneurship, learn about new areas and also to give back their network or knowledge. Of course, they are also hoping to hit a big winner and earn 10X, 30X, 50X or even 100X their original returns.

Such exits usually happen via an exit or liquidity event.

Examples include a trade sale, IPO, vendor sales to new investors etc.

They might also earn back their money via dividends once the company turns profitable though in the tech space this is a less common scenario.

Why is Angel Investing Important?

As funding in the early stages is generally limited, angel investors play a key role in providing capital and help to deserving startups.

Think of them as the initial fuel for the spark. Without this fuel, there won’t be any flames.

Angel Investing allows driven entrepreneurs to get in touch with smart money and make a difference in the world.

How is Angel Investing different from other forms of Private Investments?

Basically, private investing includes any investment into a non-listed company. So investing in PE funds or VC funds is a form of private investing. Angel investing is a niche and is a subset.

Private investing covers angel investing, but can also include later-stage investments into companies that are already larger and profitable. In addition, private investments can be in the form of debt but angel investments are usually equity-based.

Angel Investments are thus a subset.

The Current Trend in Angel Investing

Angel Investing opportunities may be present in any industry, as long as there is a startup in need of cash and there are willing Angels.

However, in recent years, there have been a significantly greater proportion of tech startups in the angel investing space.

“This could be due to greater potential for (faster) growth in tech startups and higher valuations attributed to these startups. There are also many success cases to take reference from. Garena, Razer, Jobstreet, JobsCentral all made their early angel investors many times on their capital. This attracts more HNWI to explore the space.

We started Angel Central back in 2018 Feb and within 1 year had over 100+ angels signed up. As a group, we invested almost S$4 million in 1 year!

That’s a pretty strong number and indicative of demand.”

Der Shing on why more investors are exploring Angel Investing.

Food for Thought

Why Do We Need Angel Investors in Singapore?

For Singapore to become one of the tech hubs of ASEAN and indeed Asia, entrepreneurs alone are not enough.

Startups need funding. Alvin sets out to learn more about the sentiments on Angel Investing and Startup Investing.

He shares a conversation he had with a friend:

“Over lunch, I asked my friend about the situation in Singapore – are we lacking entrepreneurs or funding. He told me frankly that it is the lack of entrepreneurs, specifically great teams with good ideas. He also said that capital is aplenty.

I wouldn’t challenge that as I have no stats to prove a case. But I believe that the bulk of the capital is available at the later stages of the startup lifecycle. And now with organizations like AngelCentral and other Seed and Series A VCs, things are improving by the day.

Funders and Founders did up a very nice infographic about the various stages of funding if you aren’t familiar with terms like seed, series A….

Angel investors, who are typically wealthy individuals, would usually be the ones who invest at the preseed and seed stage. Venture Capitalists (VCs), who are professional fund managers, would invest in the later stages. The larger and renowned VCs may not even enter until series D. Hence, the money is in the later stages.

It is indeed more risky for investors to get in at an early stage. Entrepreneurs have got little to prove but yet need money to build something worthy.

It is a catch-22 situation.

If lucky, entrepreneurs can convince a few angel investors to fund them for the development of their product. Der Shing shares that most angel portfolios of about 20 startups will have only 1 or 2 main winners, a few smaller gains and as many as 15 total failures. The returns tend to be binary in nature where investment is either a multi-bagger or a near-total failure.

Should You Become An Angel Investor?

If you are reading this guide, you might be thinking about placing your money or investment capital into angel investments in this region.

This section answers some of the most frequently asked questions that aspiring Angel Investors have.

What is the Role of an Angel Investor?

Depending on your stake, you might need to take on certain roles below. But regardless of whether you have a formal role, you are expected to be a cheerleader for the business.

With a smaller stake of 1%-2%, angel investors are not expected to play an active role in the business. You can choose to share your experience (if it is relevant) periodically. Most importantly, you should be able to get along with the management of the company and you believe in what they do. Helping them to connect to relevant people would be useful too,​​​​ if you have such contacts.

If you invested a lot or very early and own >5%, then it is possible that the management would want you to perform a structured role like that or a board member or formal advisor. These should be decided before investment.

Tax Incentives for Angel Investors in Singapore (IRAS)

The Government has introduced the Angel Investors Tax Deduction (AITD) scheme.

Their aim is to incentivise qualified individuals to invest at least S$100k into startups.

As an angel investor, you can enjoy a tax deduction of 50% of your investment amounts, up to $250k.

The Role of Angel Investments in your Portfolio

Now that we’ve covered the basic understanding of what an Angel Investor is expected to do for a startup, let’s take a look at angel investments from YOUR point of view.

Put plainly, you will be exposing your hard-earned wealth to a higher level of risk through Angel Investing. And so, you will need to understand how you should be allocating your capital efficiently and smartly.

We must only invest money that we can afford to lose completely.

If you look at most strategic portfolio allocations (i.e. various asset classes that experts help people to allocate their investible money in), most will have an alternative allocation portion that includes vehicles like private investments, art, wine, hedge funds and commodities.

This percentage usually varies from 0% to 20%.

Let’s assume you go with the max; 20% of your investable assets (excluding your own home and current business which you run, if applicable).

20% is currently what some banks recommend for alternative investments and is also what some Ultra High Networth Individuals or UHNWI (people with more than 30M USD investible) individuals in the USA are doing.

Of course, not all 20% should be allocated towards angel investing.

Der Shing suggests:

“Probably 5-10% of that? The other 15-10% is for hedge funds, PE funds, later stage VC funds, commodities etc.”

Of the 10%, you should also spread your ‘bets’ since you do not control the companies that you invest in, and have no say in its ultimate success or failure. This means investing in at least 20 startups over a 4-6 year time frame. Also, make sure you have similar bite sizing for each startup as you won’t know who will end up being the big winner.

Be warned: You will definitely make mistakes. You might end up investing in bad models, or bad people and management.

So, you will need to have proper risk management and smart capital allocation to minimise your potential losses and maximise your potential gains.

​Before you even start investing, you should figure out your bite sizing. Der Shing shares:

“For example, a decent strategy will be to set aside $500K to invest at 20K per investment at 5 investments per year. After 4 years, you will have done 20 companies and still have 100K to follow on the winners. And assuming your allocation is 10%, then you should have a net investible asset of at least S$5M to do this.”

  • Potential Returns of Angel Investing

Now that we’ve gotten the disclaimer and risk warning aside, let’s look at the upside of angel investing.

We’ve probably read about some lucky guy who invested in the next Facebook or Google at some point of time.

But let’s face it, most Angel Investors in this region will take anything from 2 years to 10 years or more to exit their investments.

Der Shing shares:

“I have invested in 26 startups since 2011. 3 have exited for some small gains while 2 have failed completely. This is normal as the winners usually need more time to really grow big. On paper, I am sitting on 230% gain on total portfolio or an IRR of 25%. But I don’t consider these as real gains until I actually exit the company. I wrote an article about my angel portfolio report card. “

An overall, annualised return of above 25% would be ideal as well.

Realistic Timeframe for A Profitable Angel Investment

As with any investment, it is not realistic to expect immediate returns in the short term. This is especially true in Angel Investing because you are usually investing in novel startups that might need time for them to gain traction in the market.

Der Shing suggests that the usual time frame to expect will be similar to a early-stage VC fund, i.e. anything from 3 years to 10 years for an exit.

Definition of High Net Worth Individual in Singapore

We have mentioned about the UHNWI, and we’ve noticed that Angel investors are usually “high net worth individuals” or successful business people who want to support new startups and entrepreneurs.

So how are “high net worth individuals” classified?

The following definition was taken from “Guidelines on Exemption for Specialised Units Serving High Net Worth Individuals Under Section 100(2) of the Financial Advisers Act”

“high net worth individual” is an individual –(a) who has a minimum of S$1 million of assets, or the equivalent in foreign currencies, in any or all of the following forms:(i) bank deposits, including structured deposits;(ii) capital markets products(iii) life policies;(iv) other investment products as may be prescribed by the Authority;[Amended on 1 July 2005](b) whose total net personal assets exceed S$2 million in value or the equivalent in foreign currencies;(c) whose annual income is not less than S$300,000 or the equivalent in foreign currencies; or(d) who is assessed by the applicant to have the potential to become a person described in (a) within a period of 2 years.”

Do you qualify to be a high net worth individual? Or do you aspire to be one?

High Net Worth Individuals can invest in financial instruments such as hedge funds which are out of reach of the public.

Alternatives to Angel Investing

Is angel investing the only way for you to invest in startups? ​

Well, no.

Here are 3 other ways investors can invest in a startup:

1 – Crowdfunding

Crowdfunding allows small companies to raise money without tapping into the stock exchange. Depending on the type of crowdfunding campaign, you might be rewarded in different ways.

You can learn more via our Crowdfunding Guide.

2 – ICOs in Cryptocurrencies

In a nutshell, ICO is the equivalent of IPOs in the stock exchanges. Instead of owning stocks, you end up with alternative cryptocurrencies.

Thanks for technology, most companies are able to issue their own cryptocurrencies. And investors are able to invest in these via ICOs.

This is a totally different field and will not be covered in this guide. You can read more about Bitcoins and cryptocurrency at our Bitcoin Guide.

3 – Become a Limited Partner

You can choose to invest directly into early stage/Series A funds. You will be called in LP (limited partner) if you do so.

These require large sums of capital. Usual quantum ranges from $250K (for small funds) to $5M for large funds.

The expected returns for these funds range from 15-25%. Some names in this area include Jungle Ventures, Golden Gate, Walden, Monkshill, 500Durians/Startups and many more. They all raise capital from time to time. You can then treat these investments just like a mutual fund but classify it under ‘alternative investments’.

So How to be an Angel Investor?

Like the idea of becoming an Angel Investor and being rewarded for it?

In this section, we explore what one needs to start investing in startups today. Of course, the most important question would be:

How much capital should an Angel Investor have?

Most angels in the South East Asia region invest anything from 25K to 200K.

Shao Ning shares:

“One mistake I made early on was to invest way above that. Doing so made it hard for us to diversify properly and spread our bets.

If your average bite is supposed to be 25K and you are doing 20 companies, then you can allocate 50K to 2-3 exceptional stories that you feel strongly about but not more. I have written a blog entry on allocation and bite sizing.”

In the current tech space, Angel/Seed round valuations range from 1M to 5M and the amount raised is usually 300K – 1M at seed to preseed rounds.

2 Ways To Find Angel Investing Deals

This is critical for success.

Here are 2 ways to look for quality angel investing deals in Singapore and South-East Asia:

#1 – Take Part in Incubators

Spread the word that you are looking to co-invest alongside incubators for SEED and Series A rounds. This way, you can follow the lead investor for deals.

This method has an advantage in that the lead investor helps settle the terms. It helps if you actually invest in some of these VC/incubators too.

#2 – Meet founders and value add to them.

Don’t just view founder meetings as potential investments. Rather try to help them with your experience and connect them to relevant people.

After a while, people will see you as a good person to talk to regardless of whether you invest. And the deals will come knocking at your doorstep.

6 Personal Lessons from an ASEAN Angel Investor

Angel investing is immensely rewarding but for the new and uninitiated, the risks of angel investing can be phenomenal.

Investing in a startup requires more than just research and analysis, there are a couple more skill set one would need to make the right call about a startup. Even then, there is no guarantee of success.

Not everyone has access to a mentor or a ‘senior’ in angel investing. We think Der Shing would have many lessons from his years in angel investing.

These are the 6 lessons that have he says has stuck him the most, in his journey thus far.

1) Invest in things you know and enjoy

All the companies he has invested in thus far are B2C companies and SAAS, with the exception of a digital animation firm. Very little hardware and no medical or biotech space.

Der Shing believes that his experience in building up a job portal allows him to share meaningfully with the companies in his portfolio. In fact one of the startups he is invested in, is in the recruitment space outside of Singapore.

Over the years, he has recognised that Fintech B2C is an area which is ripe and discovered that he has a personal interest in.

Hence, he started researching the startups in the space and have met with quite a few. He has since decided to invest in two of them and one has done pretty well thus far.

Investing in B2C businesses has allowed him to fully utilise his ability to gauge if a management team is doing a good job or not. He has also learnt more about B2C mechanics which makes him an even more valuable mentor.

Being able to value add to the entrepreneur is a big part of why Der Shing partakes in Angel Investing.

2) Invest with early-stage VC for diversification

Double your bet for the startups you like” – Der Shing

Der Shing sees investing in incubators and early stage funds as another form of opportunity for him to diversify his portfolio.

They give him another source of dealflow, and allows him to invest alongside other investors for greater traction.

3) Always invest in the person and the rough model. Motivation matters a lot!

Der Shing place an emphasis on investing in the right people before the business. As business models are rarely correct or fully refined at the startup stage, the management will need to be able to tweak, pivot and go through a lot of pain before they hit on the right model (if ever).

As an investor, the last thing you want is a founder that gives up within 1+ years of funding especially if money still not run out.

Der Shing shares:

“For me, I would be ok if the business fails after the founder has pivoted at least 2 times, has spent at least 2 years trying to make things work and has been willing to put more of their personal money in to keep things going.“

He also shares that the best key founders are those that just want to get things done. They have a just-do-it attitude and will never blame others for their failure. Frequently, they are not afraid to roll up their sleeves and do sales or marketing work. Their ego is subordinated to the business goal which they are crystal clear about.

4) Coachable founders are critical

This is related to point #3.

Some people learn fast (whether from others, actual experiences or even from books), some don’t.

A team that does not learn or which is slow to change when change is clearly needed will rarely succeed. He looks out for founders who are willing to listen, absorb new practices and who are willing to agree when numbers tell that they are wrong.

They don’t need to listen to you (the investor), but they need to listen to someone – someone who understands their industry and can actually help them succeed.

5) Invest money that is not needed, with Discipline

This is the key lesson that all angel investors must bear in mind, at all times.

Der Shing shares his portfolio management strategy:

“We plan ahead 4-5 years and use a portfolio allocation strategy that limits how much we can allocate (not more than 15%) into startups and VC/incubator funds. Each year, we keep to the discipline to invest in 5 startups on same bite sizing.

6) Invest as a way to give back to Eco-system

This lesson mainly applies to aspiring angel investors who have successfully exited your business or who have done well in your corporate job.

Not everyone is in your situation, and there are people out there who would use your help.

Der Shing on giving back:

“Putting aside 5, 10, 20% to invest back into the area you know well is a good win win. Life can’t be just about making more money, more fun for ourselves and helping only our loved ones.”

Mentoring and coaching the companies you are vested in and which you are knowledgeable about is a great way to give back.

At the end of the day, we hope we can play a part to level up the angel investing space in Singapore though our guide and building a network of investors and entrepreneur. It would indirectly help more entrepreneurs make their ideas a reality and hopefully impact more people through their work.

So if you are keen to invest or learn more about angel investing, check out AngelCentral.

They not only provide pitches and deal flow to members, Der Shing and Shao Ning also run masterclasses explaining in depth how they pick companies and handle them.