A growing population of professional angel investors are infusing money into Indian start-ups. MintAsia examines the phenomenon that's playing a central role in driving the start-up ecosystem.
Rajan Anandan, Naveen Tewari, Ratan Tata, Krishnan Ganesh and Yuvraj Singh don’t have a lot in common. Except a passion for start-ups.
That passion has led them to dip into their personal capital pools and write out cheques to more than 100 young, unlisted companies that need a leg up. Often, they are the first to put money in a company that isn’t much more than two guys, an idea and a business plan. At other times, they become the bridge between two institutional funding rounds.
Anandan and his peers headline a growing population of professional angel investors who now play a central role in shaping India’s start-up ecosystem. This year, such investors, usually high net-worth individuals (HNIs) from diverse walks of business, have already participated in 380 deals worth nearly $1.5 billion, according to data compiled by VCCEdge. This includes both investments at the angel and seed stages, typically investments in pre-revenue start-ups, and in mature start-ups that have raised several rounds of venture capital.
Professional angel investors, who typically bring the first money into a company after friends and family, are an important source of deals for later-stage investors. The growth of the venture capital industry in particular has created opportunities for angels to find follow-on capital for their investee companies. More importantly, such investors have been able to book decent profits on their investments.
“Angel investors have seen early success in the past five years and, therefore, the investment class has gained a lot of confidence," says Naveen Tewari, founder of mobile ad network InMobi Technologies Pvt. Ltd. Tewari, 37, has angel-backed about 10 start-ups, including on-demand home services provider Zimmber and property search and rentals platform NestAway.
The early success that Tewari talks about is a series of exits, an event where investors sell their stakes to book profits, that angel investors have made lately. Last January, the acquisition of Bengaluru-based analytics firm Little Eye Labs by Facebook Inc. delivered a profitable exit to angel investor group GSF SuperAngels, which had invested $200,000-300,000 in the company with Ventureast Fund. Facebook reportedly paid $10-15 million to buy the company. Last month, the acquisition of Insta Health Solutions Pvt. Ltd by Practo Technologies Pvt. Ltd for $12 million created an exit for a number of angel investors from angel network Mumbai Angels along with Insta Health’s venture capital backers Inventus Capital Partners.
Tech ventures beckon
Such deals apart, the bulk of angel investments made so far remain un-exited. However, angels who are yet to see exits currently command sizeable markups on their investments because of the massive amounts of follow-on capital that some these companies have attracted from larger investors. This is particularly true of the local consumer Internet sector, which includes e-commerce companies Flipkart and Snapdeal, run by Jasper Infotech Pvt. Ltd, classifieds platform Quikr India Pvt. Ltd and mobile payments and commerce platform Paytm, owned by One97 Communications Ltd.
The valuations of many of those companies have soared in the past couple of years. For instance, People Group founder Anupam Mittal and Orios Venture Partners founder Rehan Yar Khan, who angel-backed ANI Technologies Pvt. Ltd, the company that runs taxi hailing service Ola, are potentially sitting on very profitable returns on their investments. They own stakes of 1% and 1.8%, respectively.
Founded less than five years ago, Ola is now reportedly valued at around $5 billion. The company has just raised $225 million in a new funding round led by hedge fund Falcon Edge Capital LP.
The other important reason for the mushrooming of active professional angels is the growth in the country’s HNI population. India currently has 2,083 ultra-HNIs with more than $50 million in net wealth, says the Global Wealth Report released this week by Credit Suisse AG. That’s 3% higher than last year. The number of dollar millionaires in India is projected to grow by 65% in the next five years to 305,000 against 185,000 now, the report says.
The universe of professional angel investors currently active in India can be broadly split into four categories—entrepreneurs, corporate professionals, business tycoons from traditional businesses and, celebrities. Each group is unique in terms of its investment style and motivations.
The entrepreneur-angel group can be further sub-divided into former entrepreneurs and entrepreneurs-in-office. The two combined constitute the largest and most active group.
“As entrepreneurs like me have successful exits, they tend to use that money to fund other entrepreneurs. This has been the foundation of the Silicon Valley ecosystem," says Sashi Reddi, founder and former CEO of software testing company AppLabs Technologies Pvt. Ltd, which was acquired by NYSE-listed Computer Sciences Corp. in 2011. Reddi, 50, has since been investing in start-ups through his investment arm SRI Capital. He now has a portfolio of 16-odd companies, including YuppTV Inc., Edutor Technologies (India) Pvt. Ltd and Healthifyme, a health and fitness company.
Invest and learn
Like Reddi, redBus founder and former CEO Phanindra Sama has taken to investing in start-ups from the windfall he collected when his bus ticketing company was acquired by South African conglomerate Naspers Ltd in 2013. His two primary reasons for turning angel investor are to give back and learn.
“My first investment was ShieldSquare and their solution to arrest content scraping is superior to peers in the US and Israel. I invested because I think people like me should support global innovations coming out of India," he says. Sama, 35, has so far invested in eight companies and his portfolio, apart from computer security firm ShieldSquare includes companies such as Betaout, Nexgen PMS and Belong.
It helps, of course, that many of the companies that these entrepreneurs helm are heavily backed by financial investors. Jasper Infotech, for instance, has raised more than $1.5 billion over multiple rounds. Last month, One97 Communications raised an undisclosed amount in a large funding round led by NYSE-listed e-commerce company Alibaba Group Holding Ltd and its affiliate Ant Financial Services Group.
Entrepreneur-angels tend to invest in areas that they understand well, usually technology-related, and they prefer to come in as early as possible. “My investment approach is highly risky and whimsical. I like businesses that are likely to scale and become big rather than those that are safer and sure-shot," says serial entrepreneur and now prolific angel investor Krishnan Ganesh, 53, who now has 19-odd companies in his angel portfolio.
Ganesh invests chiefly through his investment arm GrowthStory, which he set up a couple of years ago with his wife Meena Ganesh, also a serial entrepreneur and angel investor. Their last company, TutorVista Global Pvt. Ltd, was acquired by UK media and publishing company Pearson Plc. in 2011.
Testing the waters
The second most active group of angels consists of corporate professionals who channel a part of their disposable incomes into start-ups. They include the likes of Google Inc.’s Rajan Anandan, former Genpact Ltd CEO Pramod Bhasin and T.V. Mohandas Pai, former CFO and board member at Infosys. While, these are familiar names, the group includes a vast number of professionals from diverse walks of business, including investment banking, retail and consumer goods, healthcare and life sciences and information technology.
Most of the folks in this group invest either through organized angel networks such as the Indian Angel Network or Mumbai Angels. Some also have formal and informal partnerships with venture capital firms. “I’m an adviser to firms such as Orios and India Internet Fund, and work closely with Blume Ventures and KAE Capital," Anandan said in an earlier interview. Anandan, 47, is currently India’s most prolific angel investor with more than 70 investments under his belt. Some of the more notable ones include Druva Software Pvt. Ltd, Instamojo Inc. and Lumos Design Technology Pvt. Ltd.
Genpact founder and former CEO Bhasin usually invests through the Indian Angel Network and impact investments platform Asha Impact. “I see 15-20 ideas a month, most of them already filtered. I like to invest in areas that I understand and can make a useful contribution. So I tend to avoid hot sector and businesses that need passive investment," he says. Bhasin, 63, typically invests ₹ 1-5 crore in each company and his current portfolio includes Indifi Technologies and Gadget 360.
Angel investors such as Tata Sons Ltd chairman emeritus Ratan Tata and Mahindra Group chairman Anand Mahindra belong to an emerging category of investors who hail from traditional brick-and-mortar businesses. “There’s a lot of incoming interest from that quarter in investing in start-ups. But the cheque sizes on offer, usually ₹ 10-20 lakh, aren’t significant enough yet," says a venture capitalist with a Delhi-based firm who didn’t want to be identified.
By most accounts, such investors, who would qualify as ultra-HNIs by Credit Suisse’s definition, are still testing the waters. Ratan Tata, for example, who headlines the group, has so far deployed just a little over $3 million in the 17-odd companies that constitute his angel investments portfolio. Many of the folks in this group, in fact, have also chosen to indirectly invest in start-ups by becoming investors in local venture capital funds through their family offices.
Finally, the latest and currently smallest group to venture into angel investing are celebrities. Cricketer Yuvraj Singh is now an active, even astute, investor in start-ups through his investment firm YouWeCan Ventures. Tennis player Mahesh Bhupathi is also a sporadic investor. He was an early investor in Bengaluru-based sports equipment etailer Sports365. Celebrities and start-ups don’t yet mix as well in India as they do in Silicon Valley, where musicians and movie stars are frequent investors in technology start-ups. U2 frontman Bono, actors Ashton Kutcher, Will Smith and Jared Leto, and singer Justin Timberlake are investors in companies such as Box, Facebook, Yelp and Reddit.
For start-ups, the explosion of angel investors in the country is the most encouraging sign that India’s ongoing start-up wave is closer to going mainstream than it was even five years ago.
While conceding the positive impact on the startup ecosystem, Bhasin sounds a note of caution. “The explosion is a double edged sword. This large crowd of investors is also taking valuations to unreasonable levels. Right now everyone hopes to make the next million on their investment. The chances of that happening are very slim."