Bangalore: Not everyone has recovered from the downturn yet. While venture capital (VC) firms and private equity (PE) funds have begun investing in huge numbers again, angel investors are still lying low.
Angel investors are typically rich individuals investing their own capital, Rs20 lakh-1 crore, in firms that are at an embryonic stage, without asking too many questions. At this stage, there aren’t many sources of formal capital for start-ups save for expensive bank loans. Although they represent a key source of capital for start-ups, angel investments in India are tiny—estimated at less than $200 million (Rs892 crore) in three years.
The Indian Angel Network (IAN), a body of around 50 angel investors, had eight deals in 2008 and four in 2009 when the?economy?went?into a downturn. In January-March, there was just one deal in the angel investment space. That compares with around $2 billion invested across 56 deals by PE funds in the quarter ended 31 March, according to research firm Venture Intelligence.
“The biggest casualty of (the) downturn is that appetite for early stage investments comes down considerably. Angel investments are down and it is because early stage deals are far and few between,” says Ashish Gupta, managing director at VC fund Helion Venture Partners and a prominent angel investor himself, having invested in 35 firms in 10 years. “People investing in start-ups like to see where the next round of funding will come from,” he says. “It’s a good rational reason, not an irrational one.”
Game plan: Investors in start-ups like to see where the next round of funding will come from, says Ashish Gupta of Helion Venture Partners. Hemant Mishra/Mint
Angel investors make money when larger firms invest in their portfolio companies at the next stage of growth, also known as Series A, or the first institutional round, of funding. But such early deals have fallen by at least 50% in the wake of the downturn, according to Venture Intelligence.
The investment opportunities, however, have not declined as entrepreneurs continue to start new firms, says K. Ganesh, founder and chief executive of TutorVista.com, an online tutoring firm and an angel investor in three firms.
In early April, data protection firm Druva Software raised $5 million in its Series A round from Sequoia Capital and IAN.
VC firms that are, by definition, early stage investors have started dabbling in the PE space—involving bigger deals and companies at a later stage of growth.
Entrepreneurs say attracting angel investors is tougher for firms in less popular sectors. “These investors are more exposed to mobile, healthcare, IT and education kind of start-ups, so they don’t easily understand other opportunities that are there in the market,” says Ankur Tripathi, chief operating officer and director, Indian Road Transportation Exchange, a Mumbai-based start-up. “We have been approached by angels but have not received funding as yet.”
The deal terms are also becoming tougher, with angel investors looking for ideas that are mature and with least customer traction. Also, unlike earlier, their investment approach now includes funding against milestones achieved.
It’s also taking longer to raise funding from these investors. Just about a year back, it would have taken a firm two months to get funding; now it may take double that time. “Value creation is easier and more visible in tech companies, unlike in sectors like infrastructure or automobiles where (a) large amount of capital is required than ground-level value addition,” says Gan-esh. “Good spectacular exits or monetization on non-tech companies hasn’t been seen.”
Rehan Yar Khan, an IAN member who has invested in four companies, blames the decline in angel investments on the quality of the investors themselves. An angel investor needs time (at least 2 hours daily for a start-up), the talent to spot an entrepreneur, the ability to handhold a fledgling firm while understanding its needs, and enough money to write the cheques. “Out of the hundreds who call themselves angel investors, I have come across only five-seven who have such qualities,” he says.
Shraddha Nair contributed to this story.