India’s Angel Investment Ecosystem
According to Inc42 DataLabs, though the Angel activity began in India in 2006, since H1 2015, over 1668 unique angel investors have participated in the Indian tech startup funding. Starting with 257 in H1 2015, the participation of angel investors in the startup funding reached 326 in H1 2017 i.e. a rise by 27%. Though most of the angel investors have participated in a single deal, if we look at the historical data of startup funding in India, since H1, 2015, over 127 angel investors participated in more than three deals and about 560 Angel investors participated in more than one deal. According to the NASSCOM report titled “Tech Start-up in India”, India has a very bright future if the landscape continues to evolve at the current pace. By the end of 2020, more than 11,500 start-ups are expected to come up in India. Not only has direct angel investments picked up in last 4 to 5 years, there are several angels who have come together and formed angel groups that invest by forming their own syndicates. This has led to an overall buzz in the angel investment space with a substantial interest in this asset class.
However, between the development of fundamentals of a product and the creation of a company, entrepreneurs need outside help to bridge the gap. This is where angel investors step in. They are usually wealthy, well-connected industry leaders or established entrepreneurs themselves who use their own money to support disruptive ideas.
Role Angels Play in the Startup Ecosystem
As India takes a leap in the Startup Age, Angel investors have a critical role to play in shaping the entrepreneurial mindset in the country today. Since, most of them have been ex-entrepreneurs themselves, their experience can guide their younger counterparts on the problems and risks that they may face along the journey & measures to preempt the same.
In order to usher in the next cycle of innovation in India, Angel investors need to push their investee companies to develop disruptive solutions that address and solve real-life problems. They need to encourage entrepreneurs to identify and find gaps in the various industries and build solutions to that bridge the inefficiencies. Several angel investors themselves have exited from their earlier engagements and hence, can guide teams to develop niche enterprise products with patentable technologies that can be acquired by large players.
Despite being a country with many communities traditionally dedicated to business and entrepreneurship, India still ranks low on comparative ratings across entrepreneurship, innovation, and ease of doing business in the global order. In a vast country like India with a huge population, many invariably challenges do exist that affect the daily lives of masses. In addition to that availability of capital is scarce. It is the role of angels in the country to bring out innovative ideas from the corners of the country to create services and solutions using lean techniques, that address social national problems and thus creating goodwill, which propels the nation forward.
Need for Smart Capital
Angel investors very rarely limit their involvement beyond the capital invested in any company. Post investment, they play a very critical role in handholding the entrepreneur and his team on the execution of their business plan, mentor them as well as connect them to relevant customers through their extensive network. This “Smart Capital” is much needed in the initial phase of venture-building to get market validation. According to a study by Harvard Business School, angel investors greatly improve the results and performance of the companies in which they invest. At least 14% to 23% survival rate in the coming 1.5 to 3 years is observed for start-ups supported by angel investors.
Another critical role that an angel investor plays is to help his investee company raise its first institutional round of funding. It is always beneficial to have an angel investor who is well connected with the VC industry as it helps to build the right background amongst the VCs early on, which can eventually help at the time of raising larger rounds. Hence, it is a responsibility of the angel investor to maintain relationships with such funds and keep them posted on their investee companies’ progress. It is necessary that these angel investors eventually work towards building exitable startups.
Create Awareness in an Ever-Evolving Ecosystem
Angel Investment in India is at a critical juncture where along with experienced angel investors, a large number of HNIs & family offices are also taking a plunge in this asset class. The reasons for this new breed of “Aspirational angel investors” could be many – right from being influenced by the euphoria created around startups in India, to diversify their risk and asset portfolio. Beyond the usual options available in the listed markets, many wealth managers and private bankers today are being asked by their clients to offer new and innovative investment opportunities to park their surplus funds. Today there is a rising trend amongst India’s second generation entrepreneurs, businessmen & SME owners, who have travelled the world, received international academic & professional exposure, are well read & well- connected who not only demonstrate a keen interest to play a part in this innovation ride but also possess a higher risk appetite. India had 2,083 ultra-HNIs with more than $50 million in net wealth in 2015, says the Global Wealth Report by Credit Suisse AG, while the number of dollar millionaires in India is projected to grow by 65% in the next five years to 305,000 by 2020. Some of the Ultra HNIs, as well as the global Indian Diaspora, also harbor a wish to give back to the Indian society in a way that impacts the lives of the population & creates a social goodwill, apart from economic gains.
While the above trend is definitely fascinating and gives a shot in the arm to the evolving Angel investor & startup ecosystem in India, it also brings along with it several challenges along the way. One of the most common challenges faced is a complete lack of awareness about the basic dynamics and the risk exposure, when it comes to angel investments, amongst these new entrants. This big gap in understanding & limited knowledge leads to several uncomfortable situations between the investors and their investee companies, post the investment. Many aspiring angel investors are not conversant with the various variables on which the success of their investee companies depends on and the plethora of conditions on which it is dependent on. Several times angel investment takes place as a syndicate where others may tag along with a lead that is a subject matter expert & is responsible for the Due diligence of the startup. While this is a preferred and recommended style for new angel investors, it still does not guard them against any loss, nor does it take away the responsibility of evaluating the pros & cons of the investment or make the lead liable on the case of a slowdown in the investee’s projected revenue numbers. What is critical therefore to realize that Angel Investment is a serious business and one should take a plunge only post acquiring all the relevant knowledge on the subject?
Therefore, existing angel investors who have sufficient experience & global exposure to this activity have an extremely important role and responsibility to create awareness amongst this new class of investors & guide them on their learning curve. They need to demonstrate through their examples the importance of appropriate decision making, choosing the right startup, risk diversifications & ways to mitigate problems in startups or avoid common mistakes that may happen at the time of investing. One of the major reasons for conflicts is due to mismatch of expectations of RoI at the time of investing & liquidity risk surrounding this form of investment. It is critical that the new entrants are well briefed on the same & the necessary education and hand-holding is provided from time to time. Apart from the above & in case of cross-border startup investment, one needs to take appropriate advice from existing angel investors on various legal, tax & regulatory risks of such an investment.
Given the above, experienced Angel investors in India have to play an extremely critical role to create the much-needed awareness about all these perspectives amongst the breed of ‘Aspirational angel investors’. It is their role to ensure that the right information is circulated amongst them and they do not influenced by speculative news and take an informed decision and are completely aware of the risks they will be exposed to and that, like any other asset class, the complete ownership of any loss or profit in the investment is entirely on them.
Posted By Mandar Gadkari, Global Head at CBA.