Entrepreneurial Angel Arjun Sethi on Startups

Recently, we spoke with Arjun Sethi, a venture adviser and an entrepreneurial angel investor. Sethi is currently an adviser at Shattered Reality Interactive, a casual/video game development company, and Saset Healthcare, a startup involved in the design and manufacture of high-end ultrasound machines.

Prior to Saset Healthcare, he co-founded Advanced Tuning Products, an exclusive distributor and manufacturer for Garrett/Honeywell Turbochargers, and had a stint at The Carlyle Group, one of the world’s largest private equity firms.

Sethi is interested in the internet (Web 2.0), hi-tech, and medical (life sciences) investments. His articles have appeared in VC Experts and the Journal of Private Equity. In this interview, Sethi tells us his current projects as an entrepreneur, his roles as a startup adviser, and his views as an seed-stage investor.

VH: So, Arjun, we heard that you’re working on a startup called picktor. Can you tell us more about the project and your role in this new initiative?

AS: Sure, I started picktor in August of 2008, right after I finished consulting and advising gigs with two social networking companies. I’m the founder of this new venture and have self-funded it to this point. It’s currently in alpha mode and will be launching a public release soon. You can learn more about picktor and start owning your photos on our website.

VH: What other projects are you currently working on?

AS: I also recently co-founded a game 2.0 company called Shattered Reality ROFLplay. The mission is to create online social immersive worlds that are engaging, epic, and easy to understand, whether the game is serious or casual. The original vision was to create a theme based massive multiplayer online game that could be played in 5- to-10 minute time increments anytime, from anywhere.

I also invested in a company called isocket, an open ad platform that helps advertising sellers move their inventory into the cloud. They’re currently in private beta, but you’ll hear some big news from them soon.

VH: What about your role as as a venture adviser? Can you tell us more?

AS: I’ve been helping early-stage ventures and early-stage venture firms since late 2004. I’ve mostly advised companies and firms that invest in automotive, health care, and internet/emerging media. I was lucky enough myself to be a successful entrepreneur at an early age, and I help companies avoid certain mistakes I made during my early venture days. I advise in strategies, product positioning, and business models.

VH: As an investor, which ventures have you funded and what made you invest in them? That is, what do you look for in a startup?

AS: I’ve angel-funded and helped startups raise capital in a variety of areas. I’ve been involved in exits that generated 10x to 100x returns. Most recently, I’ve invested in three internet and digital media companies based in Silicon Valley. When looking at an early-stage venture, I tend to read the team bios, but not necessarily the résumés of the team members. I firmly believe in proven team metrics, so I’m most interested in the team as a whole, its mix of experience and personalities, and most importantly, the chemistry between team members. I also look for a large addressable market rather than niche markets. The team has to be able to adapt and change the idea, and be agile to maneuver in a big market.

VH: Alright, what about due diligence?

AS: Due Diligence is tricky and different with every situation. Sometimes we need to think of the obvious questions. How does a company get new customers? The more data a company has about how many cold calls it takes to set a lead, how many leads it takes to set a sale, how much the average sale is worth, and most importantly — how long it takes. All of these ‘analytics’ will tell you if the business model is viable. In the end, a repeatable business model also adds credibility to the financial projections.

Of course, the founding management team, product development, barriers to entry, and other market factors definitely influence whether a startup can raise capital at seed or series A. I’m not discounting these factors; I’m just opinionating that once a company has sales, the odds of raising capital are higher.

VH: How do you value a startup?

AS: Great question. I’ve looked at investment valuation in terms of “beauty” — it’s in the eyes of the beholder. As an investor, sometimes, I have little or no interest in being a long-term operator of a business. So how do we value a business in its early stages? I like to make projections that attempt to forecast what a business will look like in terms of revenues and profits at the liquidity event. Valuations at the early stage are more about negotiation than science. Typical pre-money for seed/startup companies are between US$1 million and US$3 million. Experienced teams that have more valuable intellectual property (IP) and that have achieved more milestones might receive higher pre-money valuation.

VH: Discussions about the state of the economy are on the tongues of everyone these days. How’s the economy affecting the way investors distribute startup capital and what they choose to invest in?

AS: Angels and venture capitalists are looking at early-stage deals more seriously today than in the recent past. Valuations are really good right now, so I’m seeing VCs interested in early-stage companies all around the world, not only in the typical entrepreneurial hotbeds. The VCs are trying to keep some of their own late-stage companies alive when they can’t go public because there’s no acquisition market, but they’re also seeing a lot of really good deals out there in early-stage firms.

VH: Have you seen a shift in the types of startups that angel investors are flocking to right now? In other words, is there a hot field of investment?

AS: I’ve seen a trend towards clean tech investments. I don’t necessarily believe in the herd mentality rush towards clean tech as of yet. I personally like health care and internet, because they’re still immature in some areas and are ‘hot fields of investment’ right now.

VH: In your opinion, what common mistakes do angel investors make?

AS: I’ve seen many angel investors or groups turned into mini venture capital firms. I’m against that model. Angel investors are increasingly funding more mature companies, making life difficult for the early-stage ventures that historically rely upon angels. Angel groups are moving upstream, looking to dole out more money and taking fewer risks. In turn, entrepreneurs have a hard time tapping into angel capital.

VH: It’s true, especially given the current economic climate. This is in fact a great time to invest. Angels should syndicate and share the risks rather than not investing at all. Is there anything else you’d like to add?

AS: It’s important to remember that opportunities come not from the top end of the market, but from the bottom end. Innovation is driven by adversity and need, not by plenty and easy pickings of markets. Innovations often occur in a complex market that requires stimulation to drive new growth, a market where more traditional means of capital aren’t available. Not for nothing is it said that necessity is the mother of invention, and I truly believe that this will be the case in this market. The shakeout of the weak and the market gaps that are left will drive high intensity innovation, and supported by the stimulation of huge amounts of government spending, will lead to unprecedented growth in precisely the industries that are best supported by venture capital.

* Interviews are edited for clarity and readability.

Link:

• Arjun’s Blog