Mumbai: This June, Girish Saraph, founder of telecom networking product start-up Vegayan Systems Pvt. Ltd, realized that he did not yet make the grade for venture capital.

“We had done everything right, we thought, and yet we could not raise money," says Saraph, who quit a job at Communications and Power Industries Inc. in Palo Alto, California, in 2000 to take up a teaching assignment at the Indian Institute of Technology (IIT), Bombay. Vegayan was born in 2003 at the IIT Bombay incubator, launched the beta version (market testing phase) of its product in June this year, and followed up with a US patent. But when Saraph approached venture capitalists (VCs), he hit a wall.

Vegayan’s story is similar to that of scores of start-ups here, particularly those developing technology-intensive products for the Indian market. Reason: they are simply not ready for venture capital, which is typically available to companies that have already commercially launched their product or service. Start-ups such as Vegayan require angel investment, a rare resource in the Indian market. Deal sizes at this stage are usually in the $50,000-75,000 (about Rs20-30 lakh) range.

In Silicon Valley, angels are a critical part of the start-up funding cycle and take on the role of identifying and seeding new start-ups. In India, angel activity so far can at best be described as sporadic. Bangalore-based Tejas Networks is perhaps one of the early examples of a company conceived and seeded under the guidance of an angel investor—Indian-American serial entrepreneur Gururaj Deshpande. Deshpande has been followed by the likes of K. Ganesh and Rajesh Jain in later years.

Angels invested $11.9 billion across 24,000 ventures in the US in the first six months of 2007 alone, according to a study by the Center for Venture Research, University of New Hampshire. There are no official estimates on angel funding in India, but VCs here say it would be less than $200 million over three years.

To be fair, India is still a very nascent market and is pretty much where Silicon Valley was in the early 1980s. Most angels in the Valley have built successful companies in the past and have subsequently deployed their fortunes and experience in helping new entrepreneurs. “That cycle is yet to happen here," says Suvir Sujan, partner, Nexus India Capital and co-founder,, which was acquired by eBay in 2004. Sujan has angel-funded start-ups such as local search engine and legal outsourcing firm Pangea 3.

Eventually, Saraph found an angel, an Indian-American one. Two months ago, Rakesh Mathur, who had sold his first start-up, comparison shopping site Junglee, to Inc. in 1998 for over $180 million, came on board at Vegayan as an angel investor. Vegayan is Mathur’s second start-up investment in India in recent times. Other Indian-American angels who have invested in this market, selectively, include TiE (The Indus Entrepreneurs) founding member Kanwal Rekhi, Exodus Communications co-founder K.B. Chandrasekhar and Sherpalo Ventures’ Ram Shriram.

But while the angel eco-system in the country takes its formative steps, the market itself has started evolving in unconventional ways to plug the gap. First, high net-worth individuals, including successful entrepreneurs, have grouped together to form “networks". These include Delhi-based India Angel Network (formerly Band of Angels), whose 60 members include Spectramind’s Raman Roy and Mphasis BFL’s Jerry Rao; and the Mumbai Angels, which includes Sasha Mirchandani, partner, BlueRun Ventures, and Prashant Choksey, CEO of real estate company Choksey Constructions. Members invest individually and not from a fund. But start-ups are reviewed, due diligence carried out; they also have to pitch their business plans to a panel.

Second, venture capital firms focused on angel-type investments have cropped up. Bangalore-based Erasmic Venture Funds and Mumbai-based Seedfund typically invest less than $1 million per company. State government-backed venture capital funds are also seeing a revival—several, including Karnataka, Gujarat and Andhra Pradesh, have announced fresh funds—and their deal sizes indicate a focus on seed capital.

Third, firms such as Nexus India Capital, which has a $100 million India fund, and Draper Fisher Jurvetson (DFJ)—which typically invest larger amounts—are willing to play angel selectively. Nexus has invested a few hundred thousand dollars in four to five undisclosed companies, while DFJ partner Sateesh Andra says it is “very much interested in funding start-ups in the $0.5-1 million range, although selectively."

However, such firms still lack the flexibility of an angel. Sanjay Swami, founder, mChek, began mentoring Manish Agarwal and Karthik Jain, who co-founded online photo-sharing start-up, through TiE Bangalore’s Entrepreneurship Accelerator Programme “even before we formally incorporated the company," according to Agarwal. His angel funding came nine months later, in August last year. Swami also brought in Shripati Acharya, founder of Snapfish Inc., an online photo-printing service acquired by Hewlett-Packard, as co-investor.

India is seeing more angel activity than a few years ago. But the numbers are not growing in proportion to the start-ups mushrooming across the country. “As more angels see good returns, others will join in," says Naren Gupta, partner, Nexus. Until then, there is always the rich uncle.