Taliba M. writes:
Made my first angel investment last year and ready to make my second. I’m very interested in this SaaS venture (a startup) but I do not have experience in this particular sector. How should I go about this?
Also, would it be possible to request some SaaS topics?
Thank you so much. I’m a fan!
Thanks, Taliba! It does seem like SaaS is getting sexier by the day, doesn’t it?
Just 2 years ago in 2008, Bessemer Venture Partners said “the emergence of Software-as-a-Service is currently the single most important trend in the software industry and that this tectonic shift in the global software ecosystem is just beginning.”
A year later in 2009, Mint was acquired by Intuit for a handsome US$170 million. The Consumer SaaS startup was only 3 years old at the time of acquisition. Its runaway success nearly burst the SaaSiness meter right off the charts and on it went to become “The 2009 Poster Child of Early Exits” for angel investors.
You bet we’d be happy to cover the basics of SaaS companies in a series of articles! But let’s focus on you in this post.
First and foremost, you mentioned that you don’t have experience in SaaS ventures. What motivates you to invest in this SaaS startup?
According to Scott Shane, author of “Fool’s Gold?: The Truth Behind Angel Investing in America,” motivations of business angels include:
If the investment amount is small and painless (which is subjective as it’s tied to your personal net worth), or if making money isn’t your primary motivation, then you may simply treat the investment as buying something you like in exchange for psychological return. You know, the warm fuzzy feelings.
But if the amount involved is relatively painful or if your primary motivation is to make money, then it’s best to avoid the unknown and invest in areas that you’re familiar with, so you can draw on your expertise and experience when weighing an opportunity.
Having said that, we understand that investors sometimes just have to get their hands on an unknown sector that they’ve developed an interest in. So read on for some ideas.
If you’re keen on investing in sectors that you’re not familiar with, you should co-invest with investors who are experts in the field. In your case – someone who knows SaaS inside out. And if possible, start with a small amount.
Note, though, some investors don’t accept “dumb money” — investments from people who don’t have experience in the investee’s industry. These investors only co-invest with people who can bring more than just money to the deal. For example, providing expert advice, helping out on due diligence, and connecting the startup to the right people.
Therefore, personal connections are important. Your best shot is to approach an investor friend who has expertise in SaaS. Ask if she’d accept your investment and let you learn along the way.
Or, you may join an angel group. See if any members would be interested in the deal and let you tag along. Network with fellow angel investors in your group and at networking events. Ask if they, or anyone they know, have experience in SaaS companies and wouldn’t mind co-investing with someone who doesn’t.
If you can’t find anyone with necessary experience, you may hire a SaaS consultant to help you vet the deal. Of course, this would depend on how much money you’re investing. The investment amount should justify the fees paid to the consultant.
Even if you hired a SaaS consultant, it’s not recommended to go it alone. Again, the best is to co-invest with experienced investors. It’s the best way to learn the ropes of angel investing and the best way to ensure the startup will be receiving proper guidance from people who understand the characteristics of SaaS companies.
Let’s say an investor friend of yours happens to be a SaaS expert and doesn’t mind mentoring you along the way — congrats! You lucky you — now your work has just begun. You want to do what any good students would do. You want to be prepared. Do your homework and speak the language. You’ll learn more if you make it easy for others to teach you.
We love to learn, especially along with our readers! In our upcoming articles we’ll look at:
Like the rest of the content on Venture Hype, this isn’t investment advice. We’re not telling you to invest in SaaS ventures. The purpose of the series is to learn the basics and make it easy for others to teach you, assuming you’ve already decided to invest in a SaaS startup.
Sorry if we’re stating the obvious, Taliba. But some people just don’t understand. We’ll state this over and over again in all the articles in the series, so other readers who stumble on the series wouldn’t mistaken this as investment advice.
Thank you so much. I’m a fan!</blockquote>
Thanks, Taliba! It does seem like SaaS is getting sexier by the day, doesn’t it?
Just 2 years ago in 2008, Bessemer Venture Partners <a href=”http://www.bvp.com/Downloads/SaaS/Bessemer’s Top 10 Laws for Being SaaS-y.pdf”>said</a> “the emergence of Software-as-a-Service is currently the single most important trend in the software industry and that this tectonic shift in the global software ecosystem is just beginning.”
A year later in 2009, Mint was acquired by Intuit for a handsome US$170 million. The Consumer SaaS startup was only 3 years old at the time of acquisition. Its runaway success nearly burst the SaaSiness meter right off the charts and on it went to become “The 2009 Poster Child of Early Exits” for <a title=”Become an Angel Investor in 2010: An HBS Framework” href=”http://venturehype.com/become-an-angel-investor-in-2010-an-hbs-framework/”>angel investors</a>.
You bet we’d be happy to cover the basics of SaaS companies in a series of articles! But let’s focus on you in this post.
<h4>Understand Your Motivation</h4>
<h4><img class=”alignright size-thumbnail wp-image-4374″ title=”unknown” src=”http://venturehype.com/wp-content/uploads/unknown-200×200.jpg” alt=”" width=”200″ height=”200″ /></h4>
First and foremost, you mentioned that you don’t have experience in SaaS ventures. What motivates you to invest in this SaaS startup?
According to Scott Shane, author of “<a href=”http://www.amazon.com/gp/product/0195331087?ie=UTF8&tag=venthype-20&linkCode=as2&camp=1789&creative=390957&creativeASIN=0195331087″>Fool’s Gold?: The Truth Behind Angel Investing in America</a>,” motivations of business angels include:
<ul>
<li>to make money</li>
<li>to get involved with private companies</li>
<li>to learn new things</li>
<li>to invest as a hobby</li>
<li>to find a job</li>
<li>to help the community</li>
<li>because a friend of a friend has a business</li>
</ul>
If the investment amount is small and painless (which is subjective as it’s tied to your personal net worth), or if making money isn’t your primary motivation, then you may simply treat the investment as buying something you like in exchange for psychological return. You know, the warm fuzzy feelings.
But if the amount involved is relatively painful or if your primary motivation is to make money, then it’s best to avoid the unknown and invest in areas that you’re familiar with, so you can draw on your expertise and experience when weighing an opportunity.
Having said that, we understand that investors sometimes just <em>have</em> to get their hands on an unknown sector that they’ve developed an interest in. So read on for some ideas.
<h4>Co-Invest</h4>
If you’re keen on investing in sectors that you’re not familiar with, you should <a title=”Angel Investing: Team or Solo Sport” href=”http://venturehype.com/angel-investing-team-or-solo-sport/”>co-invest</a> with investors who are experts in the field. In your case – someone who knows SaaS inside out. And if possible, start with a small amount.
Note, though, some investors don’t accept “dumb money” — investments from people who don’t have experience in the investee’s industry. These investors only co-invest with <a title=”Not a “One-Trick Pony” Angel Investor” href=”http://venturehype.com/not-a-one-trick-pony-angel-investor/”>people who can bring more than just money to the deal</a>. For example, providing expert advice, helping out on <a title=”Profiting From Promising Startups: Improving the Odds (Part 1)” href=”http://venturehype.com/improving-the-odds-of-success-in-angel-investing-part-1/”>due diligence</a>, and connecting the startup to the right people.
Therefore, personal connections are important. Your best shot is to approach an investor <strong>friend</strong> who has expertise in SaaS. Ask if she’d accept your investment and let you learn along the way.
Or, you may join an angel group. See if any members would be interested in the deal and let you tag along. Network with fellow angel investors in your group and at networking events. Ask if they, or anyone they know, have experience in SaaS companies and wouldn’t mind co-investing with someone who doesn’t.
<h4>Hire a Consultant</h4>
If you can’t find anyone with necessary experience, you may hire a SaaS consultant to help you vet the deal. Of course, this would depend on how much money you’re investing. The investment amount should justify the fees paid to the consultant.
Even if you hired a SaaS consultant, <span style=”background-color: #ffff99;”>it’s not recommended to go it alone</span>. Again, the best is to co-invest with experienced investors. It’s the best way to learn the ropes of angel investing and the best way to ensure the startup will be receiving proper guidance from people who understand the characteristics of SaaS companies.
<h4>Be a Good Student</h4>
Let’s say an investor friend of yours happens to be a SaaS expert and doesn’t mind mentoring you along the way — congrats! You lucky you — now your work has just begun. You want to do what any good students would do. You want to be prepared. Do your homework and speak the language. You’ll learn more if you make it easy for others to teach you.
We love to learn, especially along with our readers! In our upcoming articles we’ll look at:
<ul>
<li><a title=”Investing in SaaS Ventures (Part 1): The Basics” href=”http://venturehype.com/investing-in-saas-ventures-part-1-the-basics/”>What Is SaaS / Why SaaS Companies Rock / Why SaaS Is Costly</a></li>
<li>Enterprise vs. Consumer SaaS / SaaS Capital Requirements</li>
<li>SaaS Monetization Models</li>
<li>How to Evaluate Saas Startups</li>
<li>SaaS Finance / Business Metrics</li>
</ul>
Like the rest of the content on Venture Hype, this isn’t investment advice. We’re not telling you to invest in SaaS ventures. <span style=”background-color: #ffff99;”>The purpose of the series is to learn the basics and make it easy for others to teach you, assuming you’ve already decided to invest in a SaaS startup</span>. It’s by no means a comprehensive guide to SaaS.
* For series, references are published in the last installment of the series.
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