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Angel-backed start-ups find favour with first-round funding

Angel-backed start-ups find favour with first-round funding
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First Published: Mon, Nov 17 2008. 09 33 PM IST

Updated: Mon, Nov 17 2008. 09 33 PM IST
Mumbai: Start-ups backed by angel funds and networks are becoming popular with venture capitalist (VCs) for first-round, or so-called Series A, funding. Angel funds and investors, entrants to the Indian start-up landscape in the last couple of years, back start-ups with initial funding that usually helps managements of such firms to begin operations.
Three firms that had earlier taken?seed?money?(capital from angel investors), have closed funding rounds from VCs this month:?Bangalore’s?online customized merchandising firm Myntra Designs Pvt. Ltd, online car sales firm Automotive Exchange Pvt. Ltd that runs Carwale.com, and an LED (short for light emitting diode) lighting firm from New Delhi called D.light Design Inc. announced Series A rounds of between $5 million (Rs24.5 crore) and $7 million, each.
Also Read Fund Flow (Graphic)
Myntra and Carwale had taken capital from angel investors Seedfund, Accel India and Mumbai Angels, which typically invest smaller amounts ranging from a few hundred thousand dollars to $1 million. D.light was an unusual case: it received a little more than $1 million seed money from VCs such as Draper Fisher Jurvetson, Nexus India Capital, Acumen Fund, Garage Technology Ventures, Mahindra and Mahindra Ltd and Gray Matters Capital, which followed up with a larger Series A round of $6 million.
Funds such as Seedfund and Accel India, and networks such as Mumbai Angels and Indian Angel Network were established around two or three years ago to address the dearth of capital for very early stage firms,?which were not yet ready for VC money. Since then, several of their portfolio firms have used the initial capital to validate various aspects of their business and are looking to raise larger rounds to scale up. Of Accel India’s 15 portfolio firms, two (Myntra and Perfint Engineering Services Pvt. Ltd) have closed Series A funding since and the firm, which closed a fresh fund of $60 million last week, says more will follow suit in coming months.
VCs say that while they don’t differentiate between firms based on prior funding by angels, firms that can show validation of their business in some?way?stand?a?better chance of getting funded, especially as funders turn risk-averse in a slow market.?“When we invest, we look for what progress the company has made. Of course, when a company has angel investors, there is? more mentoring, (which) makes this progress quicker,” says Vani Kola, managing director, NEA IndoUS Ventures. The VC, which invests from a $189 million fund, backed Myntra along with IDG Ventures India.
Start-ups that have received VC funds, say having angel investors on board helps them prepare for a VC round. “Seedfund came in at a time when we had minimal revenue and no profits (and) helped us reach a stage where venture capitalists would look at us,” says Tufail Khan, co-founder and vice-president (marketing), Carwale.com.
Other connections help, too. Sierra Ventures, that backed Carwale.com with $7 million recently, is an investor in Seedfund itself. For mobile advertising firm mKhoj Solutions Pvt. Ltd—funded by Mumbai Angels in 2007 when it was little more than a PowerPoint presentation—the angel money gave it enough runway to figure out its business model. It began by focusing on SMS-based?local?advertising, but later changed to a mobile Internet ad network that connected advertisers with publishers. A year later, it raised $7.1 million from Kleiner Perkins Caufield and Byers and Sherpalo Ventures. “A VC looking to invest $5-10 million will look for a certain amount of scale in a company. We had to make sure we were there before approaching an investor for that kind of money,” says Naveen Tewari, founder, mKhoj.
On the flip side, coming on-board a firm with other investors already on board means a lesser piece of the pie for a VC. At seed stage, angel investors take riskier bets and get stakes in the range of 25-40%, which leaves lesser stake for the subsequent investors. For a start-up, it means more people on the board of the firm. Despite the downside, risk mitigation will be an important factor for early-stage VCs in the current market. “The bar will be even higher to raise funds now. If a company can derisk by proving some component of its business model, (investors) will be slightly more confident,” says Prashanth Prakash, partner, Accel India.
namitha.j@livemint.com
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First Published: Mon, Nov 17 2008. 09 33 PM IST