Starting a business and gaining access to an early capital is necessary to get a new business of the ground. While some business owners have enough of their own capital to start and keep going, other entrepreneurs may need to seek early funding from external sources. One of these early capital funding sources is known as an angel investor.
Have you ever wondered what angel investors look for before investing in a company? If you have, then you are not alone. We wondered the same thing and to find the answer, we spoke with an angel investor who is based in Indonesia, Farid Mohd, or better known as Farid MN.
Farid is an Angel Investor, Mergers & Acquisition (M&A) advisor, and entrepreneur. Farid is a Singaporean who now lives in Jakarta, Indonesia, and has lived there since 2013. Farid founded several successful ventures within fintech, biotech and agritech; of which he exited after their acquisitions. He last exited his 3rd start up, PT Walletku, B2B Indonesia fintech as Co-Founder & CEO in September 2019 after growing the company from USD100k to USD12mil annual revenue within 3 years. The company he co-founded is part of FaridMN Labs – Successful Ventures, Building Societies portfolio of companies he build as Venture Builder.
Halalop editor, Shahfizal Musa, spoke with Farid MN to find out more about what criteria angel investors look for before investing in a business.
Shahfizal started with a basic question that most have: what is the difference between an angel investor and a venture capitalist?
Farid explained it simply as an angel investor is someone who uses his own money to invest in a business whereas a venture capitalist is someone who invests using other people’s money, which are pooled money of others in a professionally-managed fund.
“As you’ve pointed out correctly, because I use my own money, as an angel investor, my risk appetite is very different.”
Before you can get them to write you a check, you need to convince them that your business idea has potential. Here are some of the factors that angel investors consider when making investment decisions:
The first thing angel investors look for in a startup is a problem. They want to know that there’s something that needs to be solved, that you are aware of this problem and how does your startup solve the problem.
This might sound like common sense but there are many startups that fail because they don’t understand their customers’ needs. Before starting up your business, make sure you know what problems your customers face and how you can help them overcome these problems with your product or service.
According to Farid, “startups are about solving problems. However, the situation today is that most startups are just copying their competitor and thus, lack originality.”
If you haven’t identified a problem, then it’s unlikely that an angel investor will get excited about your business idea.
Farid explained, “Nowadays, investors are more particular about the type of experiences the leadership team has, with preferences for startup leaders with Ivy League background, former top consulting background, former Unicorn team members or celebrity founders.”
However, Farid believes that successful founders should have in-depth experience in the industry they are in, as they would gain insights into the real problems on the ground.
For example, an agritech startup founder should have some agricultural background, whether themselves or their family members, and a medical startup founder should have medical industry background. Having the experience gives the edge of knowing real problems on the ground that startups can solve.
When asked how do you go about choosing the right team member. This is because appearance can be deceiving. Some people they are blessed with the gift of the gab that they can sell water to a drowning man. Combined that with a stunning pitch deck, you’ll have the wrong people on your team.
Farid said that there is no way you can know really until its too late. But as Muslims the most important thing in choosing a team member of a partner to him is Integrity. He has an interesting way of looking for indicators whether a person will be a good team member of not.
“You have to investigate that the person does he pray and does he pray his Fajr and Isya in the mosque.”
This is a criteria, that it is very difficult to fulfill for a hypocrite as narrated by the Prophet “Verily, the most burdensome of prayers upon the hypocrites are the ‘Ishaa’ and Fajr prayers. If they knew the blessings that are in them, they would come to them even if they had to crawl. Certainly, I was about to order the prayer to be established and command a man to lead the people in prayer, then I would go with some men with firewood to the people who were absent from the prayer and I would burn their houses with fire.” [Sahih Muslim]
Is there a product-market fit? Is the time right for the market to accept this solution? These are some of the questions that angel investor, Farid MN, asked, when talking about the criteria angel investors have when evaluating startups.
Some other questions he raised included:
“Is there an addressable market for this? Which segment are you focusing on? If you talk about total addressable market, that might be too big for a startup to solve and it might not even be the segment of market that the startup is trying to solve.”
“Does your product serve its purpose and solve the problem?”
Most importantly, the main question is “the road to profitability.” How long will it be before the startup becomes profitable?
“It’s not just about achieving the revenues, but actual profitability.”
Takeaway: Angel investors want to know more than just the basics of your business they want to know you. Before making an investment, angel investors look at the founding team, the product and the potential for a big return on investment.
Farid MN, was also a successful startup entrepreneur with PT Walletku, B2B Indonesia fintech where he grew the company from USD100k to USD12mil annual revenue in 3 years.
“PT Walletku was involved in financing brick and mortar business, small independent retailers, mom and pop shops which needed financing.”
Farid was also modest of his achievements, “In the Indonesian context, the growth (of USD100K to USD12 million) is not big. We grew from 100 to 25,000 merchants over the 3 years.”
“The key is in the execution, and putting the right people. Especially putting in the right people on the ground.”
“Implemeting success is not that difficult, as long as you have the right system, clear KPIs (key performance indices), the right team members, and are well funded.”
“We had over 200 staff on the ground, who could monitor which stores were doing well, and which weren’t and were prone to defaulting on their loans. We were also quite selective in choosing stores which have only been operating for over two years. We were also careful to only give them financing gradually, and increase the amounts gradually, which we were then able to see their repayment profiles.”
Farid has now exited his investment in PT Walletku, where he sold off his stake to a strategic, corporate investor, a Hong Kong company.
“Nowadays, I look to invest in manufacturing companies because they already have the products which have volume sales, and they are more stable. They have a ready-market, and are well established, 8-10 years.”
“At 8 to 10 years, chances are the manufacturing company is already profitable. However, they may need additional working capital, and that’s where I can support them with my investments. As these manufacturing business owners have the track record, and good reputation, which are more important”
One mistake that startup entrepreneurs have is not having an end game. In business, this simply means your exit strategy and as an angel investor, an exit strategy is part of his investment plan. Simply put, is there a way to sell off the equity stake in the startup to another interested party?
Other than an initial public offering (IPO), startups that have not grown significantly may not have many options to choose from. One way to exit is to partner with a strategic corporate partner that is in the same business space as the startup, by way of M&A, and can lead to a mutual benefit for the startup owners and investors, where the strategic corporate partner also gains by having a foothold in a new market that the startup operates in.
That’s how Farid has successfully exited from his fintech startup, PT Walletku.
Farah Ishak is a Content Writer at Halalop. She grew up in the United Kingdom where she obtained her Bachelor’s degree in Management. Later, she completed her MBA and held senior-level positions in Malaysian based MNC. She left the corporate world to be with her young kids. She is passionate about issues concerning Muslim women, Startups and Muslim businesses in general.
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