Interview with Sanjay Singhal
The 7 Questions Interview Series: Angels and Venture Capitalists
The 7 Question Interview Series is an investigative content series where I seek out key leaders in a specific industry and/or subject matter expertise area and ask them 7 key questions that “enquiring minds want to know”. There is a twist however to these questions. I provide the interviewee with a hypothesis for each question to help frame and set context for their answer. This specific series of interviews is ideal for startup founders.
The objective of this series is to establish direct connections with VCs and Angel Investors across the globe and ask them the same set of 7 questions regarding investing in technology startups. I’d also like to know what their appetite is for investing in Canadian startups and why they do or don’t.
Interview with Angel Investor Sanjay Singhal
When would it be appropriate for a startup to seek investment from you?
My favourite case is when an entrepreneur is just starting out with an idea and maybe a prototype, and needs some advice along with $100,000 or so to get the business going. My two best investments have been with personal contacts who came to me before going to anyone else.
Once a company gets to speaking with institutional investors, or “seed funds”, their valuation is usually too high for me to get interested and get involved as an Angel. As a side note, I do invest a fair bit of money as a Limited Partner with seed funds, so I get in on those investments, but it’s professional fund managers making the decisions on which companies to back; I’m just along for the ride and the ROI.
I’m not just looking for a financial return on my Angel investments. The companies, products, and people have to be ones I like and will have fun working with. Often it’s as much a decision on supporting someone’s efforts as it is making money. And there have certainly been times when I was so impressed with a product that as a potential user I just had to see it come to life.
What’s more important: the idea, the team or both?
It’s always the team, but not in the way most people think of it. As an investor there’s no way for me to know whether a particular entrepreneur or team is a great one. I can only judge after the fact, along the lines of, “Wow, those guys turned out to be really good at running a company!”
Evaluating how they respond to pressure and adversity is the biggest part of it. If the basic idea or product isn’t good, then a change in direction, a pivot, is always possible with the best people. Since I don’t know beforehand, I can’t use “the team” as an evaluation criteria. I’ve made some spectacularly bad judgements about people based on interviewing them.
So when evaluating a potential investment, I’m forced to look mostly at the idea, and trust that I can use my own network of professionals to augment any gaps in talent that the entrepreneur might have. That means I invest principally in areas I know something about, or where I have close colleagues who know something about it. As far as the team goes, I’ll use my best judgement to make sure they’re not idiots, but there’s really no way of knowing.
Last point I’m sure someone’s going to be thinking is, shouldn’t I know a team is good if they have a good track record? Well, if they have a good track record, they shouldn’t need me to give them $100k. As for previous failures, I’m all for them as I’ve had several myself, but they don’t give you any insight on whether a person is good or not. You just shouldn’t punish people for failure.
What are you looking for in a startup team? What does a winning team look like?
The best combinations are two partners, where one is the tech guy and the other is the business guy. It’s not that you can’t have one person who’s good at both, it’s that having two frees each up to do what they do best. Their egos also don’t tend to clash as each of them considers the other the expert at a bunch of things they themselves have no interest in.
The biggest team problem you’ll have at the early stage of a business is that the partners end up not being able to work together. I’ve never seen that between a software developer and a business grad, but I see it all the time between two software developers or two business guys.
The team can be larger than two people of course, but in the very early days if an idea needs more than a few people to get to a demonstrable proof of concept, then it’s probably not a good investment for me.
What are you looking for in an idea? What does a winning idea look like?
To me it’s pretty simple. Would I want to use it myself? Either as a business tool for my company, or as a personal service or tool?
My first successful startup, Simply Audiobooks, took the Netflix idea of mailing out DVDs and applied it to CDs that Audiobooks come on. I listen to a lot of audiobooks, and they’re expensive as well as hard to find, so when my partner initially put forth the idea, I instantly thought, “I have to have this.”
Of course there are the business mechanics as well. It has to be able to either make money or be needed strategically by another company.
In the case of Simply Audiobooks, we were able to evaluate the financial potential by using many metrics that Netflix published in their public filings, like how many DVDs people used a month, that sort of thing. The only thing we had very little idea of was whether people would want to use the service, and that’s where my own desire for the product became the decision-maker for me.
Does a startup have only one shot?
I think any investor would say “no” to this question. If I encounter an entrepreneur who thinks he only has one shot, then that’s not someone I want to invest in. If the initial idea is good, then there’s almost always a related idea that might work if the initial one doesn’t. The only problem is if you run out of money, but hopefully you either have some left, or the new idea is good enough to be able to raise more money for.
Can you describe your due diligence and investment process? What’s important for a startup to know about it?
I don’t make late-stage investments, so due diligence isn’t something I worry a lot about. I like to get into a company at the point where a formal corporation and shareholders agreement don’t already exist, so I get to participate in the creation of the structure.
It’s important to know something about the people you’re investing in, so usually I’ll do some reference checks, and of course I’ll “ask around” about an entrepreneur’s reputation. Given that the person probably found me through some mutual contact, I’ll know people who can knowledgeably comment on their background.
If I like the idea, I’ll write a cheque very quickly. Lawyers don’t have to get involved until later, if at all.
In your view, is Canada a fertile ground for tech startups? If so, why and in what ways is Canada unique and competitive in this regard? Are you investing in Canadian startups? If so,why? If not, why not?
All my successful investments have been in Canadian companies, so I have to say yes, it’s a very fertile ground for startups.
There’s a strong ecosystem of entrepreneurship in Waterloo and Toronto and several other cities, fostered in part by government funding initiatives like SR&ED grants, as well as government sponsorship of Angel investment clubs, and Regional Innovation Centers where entrepreneurs can go to get information on how to start and grow their businesses.
The only problem with Canada is that there are lots of people willing to put $100k into a business, and very few who’ll do the initial growth round of $500,000 or a few million.
But that kind of investment is falling off trees in places like Boston or Silicon Valley, and Canadian companies often have to make the leap from initial capital in Canada to obtaining growth funds in the US. I’m trying to build up my own contacts in the US to make sure my own investee companies know where to look for that growth. This is not to say there aren’t great institutional funds in Canada as well, just fewer of them.
Ultimately the best source of growth capital is revenue, so I try to focus on investments that can turn cash-flow positive without achieving a huge amount of scale.
About Sanjay Singhal
Sanjay’s latest startup is Audiobooks.com, a company he founded in 2012 to take on a little company called Amazon for the lead in digital audiobook retail. He has had several entrepreneurial successes in recent years, and before that, more failures than he cares to count – the results of which include a divorce, personal bankruptcy, chronic paranoia, and an upcoming book, ‘It Seemed Like a Good Idea at the Time”, releasing in 2015.
Sanjay has had two multi-million dollar entrepreneurial exits, and his current company is at $20mm/yr in revenue and has 40 employees in three countries. He contributes actively to the entrepreneurial community by funding startups through the Angel One Investor Network, where he also serves on the Board of Directors.
Sanjay has Bachelors and Masters degrees in Electrical Engineering from UNB and UBC respectively, and an MBA from Cornell University. He resides in Mississauga, Ontario.