What most angel investors misunderstand about tech startups in Asean

Sky-high valuations in ASEAN in recent years have led to ten unicorns emerging from the region.

Post-Covid, the forced digitisation of various industries - namely automation for SMEs and a beefed-up gig economy - has thrust venture capitalists into the limelight once again. In Q1 2021, ASEAN startups collectively raised US$6 billion in funding from VCs. 

However, the region’s angel investors, often seen as ‘bridge financiers’ occupying that space between a startup’s initial bootstrapping phase and proper VC rounds, remain far less visible. Research on the group is scant, but data from 2019 showed that of the 113 startups in Indonesia that received funding, only ten involved angels.

Similar to their western counterparts, angels in Asean are high net-worth individuals who back startups in the pre-seed and seed stages, with ticket sizes usually ranging from US$10,000-US$25,000 for pre-seed and US$25,000-US$200,000 at the seed stage.

Long investment horizons for angels are the norm, between five to seven years, with some even looking beyond ten years.

However, unlike western investors and angels that benefit from a mature tech ecosystem and similar regulatory environments (like EU’s single market), Asean founders and angels craft products and growth plans based on the disparate cultural, geographical, and regulatory environments across ten member nations.

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As such, angels are typically investors that are incredibly familiar with the nuances of Asean markets.

Apart from a few serial entrepreneurs and successful first-generation founders, angels in the region tend to include generational heirs, returning diaspora of young, high-earning executives, or expatriates who have spent years in the region.

These latter two types are also common characteristics of startup founders, a key link between angels and founders.

Flag on the play

When the penny drops, Southeast Asia’s digital economies will never resemble those in the US or China. Plainly put, seed investing in Asean is far riskier than it is in mature markets. Angels need to have a heightened level of skepticism when meeting founders for the first time. 

More often than not, angels find themselves dealing with early-stage entrepreneurs that don’t yet have a 360-degree view of their own space.

But even with this in mind, angels still need to look for inherent competitive edges that exist in these founders. After all, all they have to do is figure out how to harness one of these edges well.

When having pitch meetings with founders in Asean, I tend to look for three red flags that could potentially spell trouble down the road: unstable leadership, no acknowledgment of competition, and unrealistic expectations. 

The first is a somewhat broad definition. It can include a startup having too many chefs (co-founders) in the kitchen, no technical team in place, no pre-existing domain expertise, or founders simply not being invested enough in their own business.

Domain expertise is particularly important. If you claim to disrupt the healthcare sector, why don’t you have anyone on your team with healthcare experience?

Too many founders, drawn to hyped-up headlines and investor exuberance, don’t entirely believe in their product and instead just try to riff on ‘hot’ sectors like fintech or AI. This is perhaps the most important thing to be vigilant about.  

In Asean, we see localised versions of successful US startups all the time.

So when a founder claims to have no competition or that their idea is unique, your internal alarm bells should ring. Even if the startup is leveraging patents, assuming that will keep them insulated from the competition is foolhardy at best.

There’s nothing wrong with having an Uber in Asean (see how well that worked out with Grab and Gojek?) but the key is in understanding your markets well enough to make the necessary local adjustments. 

It’s also important to evaluate the founder’s ability to convey a meaningful story in the context of their product.

If you as an angel can foresee the founder’s story coming true, it’s worth a bet that the founder can use that story again later to raise more capital from other investors. This may sound overly simple, but at least in my case, it’s proven true on many occasions.

Similarly, unrealistic founder expectations early on - be they financial projections, staffing plans, or market expansion blueprints - can eventually bring down the house of cards when investment money gets exhausted. 

Katerra, which aimed to disrupt the construction industry, recently filed for bankruptcy after years of venture funding, acquisition sprees, and marquee investors like Softbank in their corner.

In hindsight, the startup demonstrated unstable leadership: frequent change of CEOs and no one with construction expertise. It also had unrealistic expectations baked in from the onset that led to future problems: projects delayed and abandoned, factories plagued with mishaps, broken promises to deliver at low cost, and even front-loading revenue figures. 

Playing it SAFE

How can angels in Asean dodge bullets like these? Since the 2000 dot-com boom and bust wiped out a generation of startups, angels in Asia have been more risk-averse, prioritizing profit and revenue over swelling user numbers.

In early deals, the best angels tend to invest via ‘simple agreement for future equity (SAFE) or convertible notes.

These instruments provide a degree of protection if startups go under (as creditors are prioritized over shareholders) while resulting in a bigger equity stake if a startup does well in future funding rounds.

Just as they do with other investment classes, angels should try to be as prolific as possible when backing startups to diversify risk.

Don’t limit yourself to a certain sector or service, but build a portfolio that plays to a variety of themes. Deal sourcing and information requires a lot of legwork, but if you want to take a proper stab at angel investing there are several options: join an angel investment network that can link you to up-and-coming startups (with government participation in many ASEAN angel networks, these startups may also be pre-vetted for grants) and other angels. Co-invest with other, more experienced angels to get your feet wet or appoint a full-time manager to handle your portfolio day-to-day.

Seeing other angels as partners, not competitors, will also help you parse out which founders are ‘for real,’ in addition to pooling together network resources that may help the startup in later funding rounds.

Above all, don’t be discouraged when startups in your portfolio fail, or a particular investment just doesn’t pan out. Angels need to be prepared to make a lot of bets. If that’s not your cup of tea, my advice is simple: don’t try to be an angel in Asean.

The writer is CEO of Prasetia Dwidharma.