Mohan Markandaier and the Risks and Rewards of Angel Investing: A Practical Guide for Beginners

by Mehr Sokhanda

Angel investing involves injecting capital into startups in exchange for equity, offering high risks and potentially high rewards. For those willing to navigate its complexities, angel investing can be a thrilling addition to their investment portfolio. However, understanding the nuances is crucial for success.  

At a recent Angel Investing 101 event, we hosted Mohan Markandaier, the managing partner at Good News Ventures, who provided valuable guidance on preparing for first-time angel investments. With over 25 years of experience as an entrepreneur and numerous successful exits, he has experienced the highs and lows of funding technology-driven startups across North America.  

During his presentation, Markandaier dissected the intricacies of angel investing, discussing “the good, the bad, and the ugly” aspects for budding investors. He provided insight in how to strategically build a diversified investment portfolio, the importance of detaching from emotionally driven decisions, and how to effectively time the market. He also emphasized the critical role of founder execution, how founder execution can dramatically sway investment outcomes.  

The Good, the Bad, and the Ugly 

Angel investing is more than just providing capital to promising startups; it is a gateway to fostering innovation and potentially reaping significant financial rewards. However, like any investment, it comes with its share of challenges.  

The primary allure of this form of investing, as Markandaier highlights, is the potential for substantial returns on investment, particularly if a startup succeeds spectacularly. He further notes, however, that for investors it is not just about financial gain; it is about being part of groundbreaking innovations and helping shape future industries. Beyond these benefits, it is a unique opportunity to make a positive impact on the community as he states: “The first mindset is to give back. This means providing mentorship to young, budding entrepreneurs with a helpful attitude. It goes a long way, and everything else will be a side-effect.” In this sense, he reinforces the idea that the primary focus should be on helping and supporting others, and the rest will naturally transpire.  

Additionally, angel investing provides access to a vast network of like-minded individuals. Markandaier highlighted the importance of this network, sharing, “I have met people through angel investing who have become lifelong friends.” This network can offer invaluable support, collaboration opportunities, and further investment prospects. 

However, venturing into angel investment poses some significant risks. One of the most significant downsides is the high failure rates of startups. Markandaier candidly stated, “There’s an extremely high failure rate, so the financial return will be a byproduct of everything else you do.” Investors must be prepared for the possibility that many of their investments may not yield returns. 

Moreover, the long-term nature of angel investments requires patience and commitment. Unlike traditional investments that might offer regular dividends or more predictable returns, angel investments often require a lengthy wait period since they are not immediately liquid. As Markandaier explained, “When you are an Angel, you are not looking for doubling your investment. You want to look for 50x or 100x returns, which means it may take 12 years.” 

The most challenging aspect of angel investing is the inherent uncertainty and lack of due diligence. Markandaier pointed out, “There is little due diligence at the early stages; it is more of an art than science. You are literally betting on the founder and their capability to execute.” This uncertainty makes it difficult to foresee which startups will succeed and which will fail. Furthermore, the relationship between investors and founders can also be unpredictable. As Markandaier noted, “The market changes, the product changes, the founders face challenges, and co-founders may split. These are all part of the process.” Investors need to be aware of these potential hurdles, be adaptable, and resilient. 

As well, the process of diversification is crucial when it comes to angel investing. Markandaier emphasized the importance of not putting all your eggs in one basket, suggesting that investors should not just invest in one company but instead, build a diverse portfolio of startups to mitigate risk and increasing the potential for significant returns. He recommended, “The portfolio approach is important, you have to build about 20-25 company portfolios over a period of three to five years.” This approach helps balance the inevitable high failure rate in the startup ecosystem and, according to Markandaier, it’s not just about reducing risks but also about increasing the chances of getting a “homerun.” 

Despite these challenges angel investing remain an exciting and potentially rewarding endeavour. As Markandaier succinctly put it, “Being in the heart of innovation, you are making a significant impact, whether it’s AI, quantum computing, or web 3.0 technologies.” 

Avoid Emotionally Driven Investments 

Emotional investing is a challenging aspect of venture capital that can lead to poor decision-making. As Markandaier pointed out, “emotional investing and not investing are both equally bad.” He first elaborated on the latter by sharing the common regrets investors have: “If you ask most investors, they do not regret the companies they invested in, they regret the companies they missed out on.” This sentiment highlights the emotional strain of potential missed opportunities, often referred to as the “anti-portfolio.”   

When it comes to emotional investing, Markandaier advises maintaining objectivity. He notes the tendency to overvalue one’s personal experiences and biases: “In emotional investing one tends to think that problems they have experienced are highly generalisable and worth investing in. It is, therefore, crucial to take a step back and validate your idea beyond your own perspective. Ask yourself if there is really a market for the problem, if it is a significant enough issue, and if it can lead to a successful and scalable business.” This balanced approach helps ensure more sound and rational investment choices. He warns against this emotional bias: “You tend to drink your own Kool-Aid and not look through all the challenges you will face,” referring to the tendency to become overly optimistic about personal insights without critical evaluation. By removing emotional biases and rigorously validating investment decision, investors can improve their chances of making more successful and profitable investments.  

The Importance of Founder Execution  

Understanding the founder’s abilities, in angel investing, is imperative. As Markandaier explained, success often hinges on recognizing why now is the opportune time to invest. He emphasized the importance of assessing the founder’s vision and their potential to revolutionize an industry. “Everything that you do at this pre-stage is all about the founder,” he said, highlighting the need to evaluate whether the founder is a “genius,” “visionary,” or “freak” with a mindset that extends beyond the current market. Markandaier added key qualities that should be present within the founder, “They must be courageous and passionate about the problem, someone who can persevere when things get tough.” 

He also mentioned the critical importance of founder-market fit in the success of a startup. He stated, “You also need to look for founder-market fit. “Has the founder or the founding team experienced the problem within the industry? Do they have the necessary experience to respond to it?  Founders with firsthand experience with the problem they aim to solve are more likely to understand the nuances and challenges involved, increasing the likelihood of developing a product that resonates with the target audience and achieves market success. 

The full commitment from founders is important when seeking investment. As per, those who wait to leave their jobs until they have raised a certain amount of capital, Makandaier suggests they are not worth investing in.  Outside investors are unlikely to take a risk on a founder who has not already taken the plunge themselves. Markandaier adds, “a founder who receives capital from their friends or family, is usually a good signal because they have incentive to pay them back.” This adds another layer for investors to consider- ensuring the founder is genuinely invested in the success of their venture. 

Looking for the “Right” Timing  

Lastly, timing is a critical factor in the success of a startup. Markandaier explains, “Timing is everything! Uber, for example, would not exist without smartphones equipped with GPS. This illustrates how technological advancements, such as smartphones, are essential for certain business models to thrive. Similarly, he mentioned how Airbnb capitalized on the financial crisis when people were seeking cheaper alternatives, which helped validate their model. Markandaier adds that understanding and leveraging user behaviour within the current technological and regulatory environment is crucial for a startup’s success, “Overall, one just needs to stay focused on founders and continue learning on what is evolving around them and look for those timings.” 

Success within the world of angel investing demands careful evaluation of founder commitment, market fit, and timing. By building a diversified portfolio and minimizing emotional decisions, investors can better navigate its complexities. Successfully navigating through the obstacles and risks it presents allows for the opportunity to make a meaningful impact and be at the forefront of innovation. 

Join our dynamic community of like-minded individuals who are actively involved in funding and mentoring promising entrepreneurs. For more information on how to become an investor with our angel investment community, read more here. 

ABOUT: Mehr Sokhanda is a researcher and writer with Altitude Accelerator, a non-profit innovation hub and business incubator which provides programs to help founders grow and scale. Mehr is currently pursuing her undergraduate degree at the University of Toronto in Economics and Communication, Culture, Information & Technology.

Related Posts