Angels investors join PE, VCs in funding start-ups
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In early March, Rahul Gill snagged a meeting with prolific angel investor Zishaan Hayath in Mumbai. Gill, a Gurgaon-based entrepreneur, was happy to have got an opportunity to pick Hayath’s brains on product and technology.
About a week ago, Pickingo Logixpress Pvt. Ltd, Gill’s eight-month-old hyperlocal logistics start-up, raised $1.3 million in its first institutional funding round from Hayath and venture capital firm Orios Venture Partners.
“Ten days after we met, he (Hayath) made an offer to invest in the company,” Gill said, adding that Hayath put in about 5% of the capital in the funding round.
The Pickingo deal represents the new normal in angel investing in India.
Over the last four and a half years, angel investors have clubbed investments with institutional investors across 440 deals worth $1.26 billion. That constitutes 83% of the overall $1.52 billion worth of deals that angels funded in that period.
While such deals have grown consistently over the past four years, 2015 has been a particularly active year. Since January, angel investors have clubbed investments with institutional investors, primarily venture capital (VC) firms, across more than 90 deals worth over $400 million.
Hayath, whose day job is running the online test preparation platform Toppr, is in distinguished company.
Leading the roster of angels who are embracing club deals with VC firms is Google India managing director Rajan Anandan. “I make 10-15 investments each year and a third of those would be club deals with VC firms,” Anandan said in a phone interview from Gurgaon.
One of India’s most sought after angels, he has invested in 40-odd start-ups so far.
Some of his club deals include Hyderabad-based mobility start- up AppVirality, Delhi-based big data company SocialCops and Mumbai-based online gifting platform GiftcardsIndia.
Other angel investors include People Group founder Anupam Mittal, redBus founder Phanindra Sama, InMobi’s Naveen Tewari, former Infosys Ltd chief financial officer and Aarin Capital’s founder T.V. Mohandas Pai, and Snapdeal founders Kunal Bahl and Rohit Bansal.
And, they’ve been popping in deals that don’t quite fit the classic definition of angel investing.
Last week, Bengaluru-based Scripbox.com India Pvt. Ltd, an online mutual fund investment platform, raised $2.49 million in a Series A round from Accel Partners and a group of angels including MakeMyTrip founder Deep Kalra. Last month, private equity (PE) professionals Ashvin Chadha and Shailesh Mehta joined Saama Capital and Mayfield Fund in a $10 million Series A round in Ahmedabad-based debt-financing platform Lendingkart. The two angels together pumped $3 million into the firm.
Earlier in June, Kunal Bahl, Rohit Bansal and Phanindra Sama joined Matrix Partners India and Blume Ventures to invest $5 million in recruitment platform Belong.
In the same month, Anupam Mittal and other angels teamed up with Sequoia Capital India and KAE Capital to infuse $5.5 million in online logistics marketplace Porter.
In March, Naveen Tewari was among a group of angels who joined IDG Ventures India to invest $1.5 million in managed home rentals marketplace, Nestaway.
It isn’t just individuals angels who are placing bets along with institutional investors.
The organized angel networks, such as Indian Angel Network (IAN), Mumbai Angels and The Chennai Angels are doing the same.
July saw a number of such deals. Organic products marketplace JoybyNature raised $1 million from an investor consortium that included Mumbai Angels, Hero Group scion Abhimanyu Munjal and Contrarian Vriddhi Fund.
Self-drive car rental company Zoomcar picked up $11 million from VC firms Sequoia Capital India, Nokia Growth Partners and the New York-based angel investor group Empire Angels.
Software-as-a-service start-up Cloudcherry Analytics raised $1 million from IDG Ventures India and Chennai Angels.
“About 10% of our deals so far have been co-investments with VC firms,” IAN president Padmaja Ruparel said in an email.
IAN peer The Chennai Angels has been involved in three club deals with VC firms so far and has another three in the pipeline. “All three deals closed in last 12-15 months,” said Sameer Mehta, an executive committee member with Chennai Angels.
Even relatively new angel networks are keen to get on the bandwagon. Mumbai-based CIO Angel Network is one of them.
“None of the deals we’re evaluating currently are in concert with VC firms. But we are not averse to such deals,” said Bindia Maheshwari, vice-president, CIO Angel Network.
The overall investment numbers and frequency of deals are evidence that angel appetite for start-ups has grown; as has the population of professional angel investors.
“The interest in our seed round was so high we had an oversubscription situation,” said Shailesh Mehta, founder, JoybyNature, over the phone.
The company first received a term sheet for its $1 million round from Contrarian Vriddhi Fund.
Around the same time, Somak Ghosh, managing partner, Contrarian Vriddhi Fund, floated the deal with Mumbai Angels, which decided to get on board. In parallel, the founders also received interest from individual angels, including Abhimanyu Munjal.
What’s also evident from the numbers is that angels have moved from backing primarily pre-seed companies, often even before there’s a proof-of-concept or working prototype, to relatively safer deals. Today’s angels are comfortable, even eager, to get in on later-stage deals.
“It has less to do with angels and more with large-seed investment programmes that most top VC firms have rolled out over the last 18 months,” says Anandan, who is an advisor to VC firms Orios and India Internet Fund. He also frequently co-invests with early-stage firms, such as Blume Ventures and KAE Capital.
Indeed, over past 18 months, nearly every VC firm active in India has aggressively gone after seed -stage start-ups —typically pre-revenue firms —that are at an advanced stage of product development. Last year, leading VC firms, such as Sequoia Capital India, Matrix Partners India, SAIF Partners, IDG Ventures India, Nexus Venture Partners and Accel Partners, together backed a record 60-odd seed-stage start-ups.
“Early discovery of the best opportunities has lately become an important part of our strategy. Angels are usually the first touch point for founders,” said Rishi Navani, managing director, Matrix Partners India. The Mumbai-based firm so far has done about five club deals with angels, as part of its seed investment programme.
VC firms, such as Matrix Partners India, actively engage with organized angel networks, informal syndicates and individual angels to source deals.
Accel Partners, for instance, is an investor in angel deal-making platform Let’sVenture. Rival IDG Ventures India works closely with organized angel networks to source deals.
Blume Ventures, which started up a couple of years ago as a seed investments-focused fund, adopted club deals with angels as a strategy. About 75% of its total deals so far—it has done about 60—are club investments with angels. “We are still focused on the seed-stage as an entry point.Therefore we seek partners who can add value. In some cases, co-investors will be peer VC firms, and in others, it will be angels,” Blume Ventures managing partner Karthik Reddy said in an email. Entrepreneurs are not complaining. “VC investors bring a degree of stability and the ability to write large cheques in later rounds. Angels bring in perspective on business operations. It’s a win-win,” said Zoomcar founder Greg Moran.
T.V. Mohandas Pai agrees.
“When VCs get in early, it becomes easier for start-ups to raise the next round,” he said.
Pai’s latest club deal is a $2-million round in on-demand home services marketplace Zimmber with Omidyar Network, IDG Ventures India and Sherpalo Ventures.
Prior to its $11 million round last month, Zoomcar had raised a $8 million round from Sequoia Capital from a group of angels including Pai, Manipal Group’s head of corporate affairs Abhay Jain and Empire Angels.
While that may hold true in theory, it may not always work out that way. In the past, there have been several instances where VC firms, which invested in start-ups at the seed-stage, didn’t roll up the investment to the Series A round.
In the VC universe, that usually signals that a deal has gone bad. Other VC firms are unlikely to touch the deal.
“As a principle, VC firms should enter a seed round only if they are confident of going into the next round,” said Ash Lilani, founder of Saama Capital. The firm entered Lendingkart during its $600,000 seed round in March. “The round was led by Ashish Goenka (chairman of Suashish Diamonds Ltd). Saama came on board with the assurance that it would participate in the next round,” said Lendingkart founder Harshvardhan Lunia. Last month, Saama and Mayfield led a $10 million Series A round in the company.
Angel investors could also find themselves in a tricky situation in the event that a VC firm is reluctant to roll up a seed investment to a Series A round. Unlike VC firms, angels typically invest their personal capital and to that extent, have limited resources. That can prove dangerous for capital-intensive start-ups, for example, in e-commerce sector.
The bigger problem is that with angel investors increasingly preferring to invest alongside VC firms, capital is moving away from pure angel deals. Compared to the $1.26 billion worth of deals angels have funded in concert with the VC firms since 2011, only $258 million has gone into pure angel deals, i.e. deals that don’t involve VC firms.