Mumbai: Angel investors and seed funds have emerged as the key backers of early stage companies this year as traditional venture capital investors seek transactions that are valued at more than $2 million (around Rs.11 crore).
The change in the start-up ecosystem has happened as the majority of angel and seed funds have established operations over the past 24 months and have already become a noticeable source of funding for start-ups.
Experts see the emergence of these investors as an extremely crucial step for entrepreneurs as only 10% of start-ups manage to survive and often die a premature death because of lack of capital.
There have been 114 angel and seed investments worth $60 million this year so far, compared with 65 such deals worth $19 million in the same period in 2011, according to estimates by VCCEdge, which tracks investment activity in the country. There have been 152 VC (venture capital) deals worth $769 million this year so far. Seed investments refer to deals anywhere $500,000 and $750,000 in start-ups, which are typically less than two years old. Angel investors, also known as angels, are people (CXOs, business men and high net worth individuals) who invest their own capital—mostly between Rs.20 lakh and Rs.1 crore—in firms that are often nothing more than business ideas.
“There are more seed funds now, that’s why more seed stage deals are being done.” said Sasha Mirchandani, managing partner at Kae Capital, which has done eight deals this year. He added that seed funding activity would only increase. At least seven new seed funds investors made their debut deals last year, including Nirvana Capital Advisors, Omnivore Capital, My First Cheque, KAE Capital, Hyderabad Angel Ventures, Blume Venture Advisors and Seedfund II. Besides numerous individual angel investors and the two prominent angel networks—Indian Angel Network and Mumbai Angels—other relatively new angel networks founded last year include Hyderabad Angels, YourNest Angel Fund, Bangalore Angels and Angel Prime. VentureNursery was started this year.
Experts say the momentum will continue as more angel networks are being firmed and existing groups are increasing their angel base. “Angel funding will grow up steadily. We have more than 150 angels with us now, compared with about a 100 earlier,” said Anil Joshi, vice-president at Mumbai Angels, which has invested in eight start-ups this year and is hopeful of investing in six more by the end of December.
“The share of early stage deals (versus growth stage) in the VC segment has gone up consistently over the last few quarters. The average ticket size has also trended downwards—indicating a preference for seed rounds,” said Arun Natarajan, managing director and chief executive, Venture Intelligence, which tracks investment activity in the country. According to Venture Intelligence estimates, the average investment size in the VC space in the first three quarters of this year is $3.66 million, compared with $4.9 million in the same period a year ago.
Natarajan said that despite poor returns from the stock market over the past five years, the graph for angel investing and seed funding continues to trend up, which was not the case earlier when HNIs used to index their net worth to their stock market portfolios. “The angel investors of today are experienced entrepreneurs and executives who have seen ups and downs of a business,” he said, adding that the momentum of investments by early stage investors would continue. “Now VCs are seeing sense in letting first round investors cash out partly or completely. This encourages other angels to invest. It also encourages the investors who have cashed out to re-invest in new companies,” Natarajan said.
One of the other reasons for the fall in average investment size is that some of them are so-called series B and C rounds (subsequent second and third round of funding) for investments done in 2010 and 2011, years that saw most investments head to e-commerce companies. That preference for e-commerce companies has taken a beating in 2012.