Ajeet Khurana

Member, Mumbai Angels

Mumbai

About Me

I am a full-time investor, and mentor several rapidly growing businesses in what is commonly called the "startup" landscape. Straight out of an MBA program from the McCombs School of Business at the University of Texas, I chose the rather unorthodox path of taking on a full-time teaching assignment. That didn't last long, but was indicative of the strong emphasis on solid conceptual knowledge. Eventually, I turned into an education entrepreneur through most of the 1990s – a business I exited in the year 2000.

My Criteria for Investing in Startups

All criteria can basically be boiled down to two: market and team. Market includes the sector, the idea, and the product. The team includes the personality, thought process, cohesion, skill-set, maturity, credibility and background of the founders. Some angel investors focus almost entirely on one of these two basic criteria. In my case, I use "market" as my elimination criteria. If I feel that the entrepreneur in not in the right market, I will not invest. But after elimination by market, I proceed with selection based entirely on team. At the selection stage, I ignore my beliefs about the market. Note, that market does not necessarily relate to the exact and specific offering of the startup – that can change over time. Instead, it focuses on the sector of the economy that the company operates in, and the value it attempts to create for its customers.

Attributes I Look for in an Entrepreneur

To begin with, I think that honesty is critical. And honesty is not a narrow trait. I like to see honesty in the entrepreneur's thinking and in relationships. I like to see entrepreneurs honestly admitting to the fact that almost all the problems that their startup is facing are entirely owing to the limitations of the entrepreneurs themselves. Lack of honesty is a deal breaker when I receive mentorship requests. Other than that, I like to see entrepreneurs demonstrate conviction in their offering. Conviction is not about being able to defend your ideas in a verbal duel. Instead it is about genuinely feeling that your offering is going to make a big difference to its consumers. And finally, I like to deal with entrepreneurs who have a need for speed. This last one is as important as the previous two. But as an investor I find myself to be a better judge of honesty and conviction. I have had to face the frustration of entrepreneurs demonstrating paralysis-by-analysis all too often. Other factors such as background, knowledge, connections, and other resume-items present themselves as hygiene factors in selecting the entrepreneur.

Common Mistakes Startups Make

Entrepreneurs are as creative in committing mistakes as they are in coming up with business solutions. So there is no one-size-fits-all here. But some of the most common mistakes I have seen startups make are:

Working under the false assumption that raising investor's money is in itself a big business goal. It is not! Investor's money has to help the entrepreneur achieve its big goals.
Paying people too high, too low, or arbitrarily. Hiring has to be part of a well thought out process. It does not necessarily need an HR expert, but it does require some soul-searching by the entrepreneur in terms of the kind of initial employees they would like to build their organization with.
Seeing investors are gods before the investment, and like the devil immediately thereafter. This one is also the investor's fault as they sometimes assume that they know more than the entrepreneur about the business.

There are many other common flaws. But the lesson is clear. On the one hand, all entrepreneurs are going to make mistakes. On the other, no entrepreneurial venture is so strong that it can withstand an entrepreneur who makes every mistake possible. You can fail (some would even say "should fail") at some things, but you should not always have to reinvent the wheel. Instead, you should learn from other people's mistakes as well.

Portfolio Companies

Some of the companies (in alphabetical order) that I have invested in 2012; and my primary rationale:

Carve Niche Technologies: With the number of digital classrooms in the Indian K-10 schools approaching the 100,000 mark, the focus has to turn from quantity to quality. This is where a superior quality provider like Carve Niche stands to gain.
Karmic Life Sciences: A strong entrepreneur combined with stellar performance made it a must invest despite my lack of knowledge about the Clinical Research space.
Maximojo: The problem that Maximojo's hotel reservation software solves is too compelling to overlook. If you visit any other online travel sites you will notice that they primarily list 4 and 5 star hotels. The reason is that smaller hotels do not have the wherewithal to maintain the IT required to tap into global hotel booking networks. Maximojo has created a low price, easy to use system that overcomes that problem.
Rolocule Games: In terms of quality of games coming out of India for the iOS platform, I believe that there is no firm that can match Rolocule. If they successfully scale up their game development effort, very little can stand in the way of Rolocule becoming the high watermark in terms of the kind of returns that angel investments can generate.
United Mobile Apps: In the 4G space, UMA is one of those rare core technology plays coming out of India. Since 4G technology marks the convergence of all communication, including television, to the Internet Protocol, a few good deals for UMA's stacks in 4G devices can cause it to skyrocket.

In addition to financial investment as an angel investor, I also invest in terms of my time as a mentor. A few of my recent mentee companies are TheMis, Volition Labs, and EnableM. The near future should see them emerging as strong cases for investment.

Most Popular Types of Businesses in India at the Moment

In the early stage environment, tech businesses, primarily IT businesses are always going to be the preferred route. IT businesses give entrepreneurs a shot at achieving great financial success in a relatively short time. In fact, if you look at my early stage portfolio, it consists of gaming, software, education technology, and core technology. Only one of my companies is outside this space.

There are always going to be trends and fads. When I was an education entrepreneur through the 1990s, very few investors took the sector seriously. But over time, education turned out to be a hot space for entrepreneurship. If you are starting up today, you have a glorious 25 years, or more, in front of you. Why build tomorrow's businesses on today's rules? Focus on your passion – as long as it solves a problem, while being scalable. That is the best space for you to be in.

Thoughts about Being a First Angel

I like to be the first investor other than friends and family. But that is not enough grounds to reject a startup – it is merely a bias. In my experience, the first investor affects the greatest influence on a startup. Since my investment philosophy is fairly hands-on, being the first investor helps. I think that all angel investors should retain 50-70% of their investible amounts for follow-on investments. That is where the real returns are likely to come from. Look at this arithmetically. If 75% of your initial investments fail, the remaining will have to grow 4-fold merely to get you your money back. So, how will you ever make multi-fold returns? The answer lies in follow-on investment. If you are highly selective about follow-on investments, and invest larger amounts in the follow-on stage, then the weighted average return will turn in your favor when your companies do well.

How Much to Offer an Angel Investor

I think that an entrepreneur should retain at least 25% of the company's equity going into an IPO, i.e., after as many as 4 rounds of funding, not counting bridge rounds. If that is the case, then the first investment, which will be at the lowest share price, should divest 15-30% of the company, not more. Giving board seats is fine, as long as the entrepreneur is sure of two facts:

the investor is not a busy-work factory, i.e., keeps requiring you to create reports for the board
the investor seems fascinated to get a board seat.

In the case of all sophisticated investors that I know of, the likelihood of the wrong kind of board member is low. But in the case of new angels these risks can sometimes raise their heads.