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Where Are The Angels?

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If it was not for Reid Garrett Hoffman and Peter Thiel, who wrote cheques as the first angel investors to Facebook’s Mark Zuckerberg, the social networking landscape may not have been as we know it. Or, may be not. Perhaps, another angel may have invested.

If it was not for Ron Conway — one of the most celebrated angel investors of this era — Google, Twitter, Square and PayPal may have been a different story. Or, may be not. For every Conway, Hoffman and Thiel, there would have been a Jones, Johnson or Jackson. The former were, perhaps, lucky to spot the opportunity; luckier still that they got to invest.

But if that can be said with reasonable certainty about the 300,000-strong angel community in the US, India is a completely different story. Lucknow-based 30-odd-year-old entrepreneur Saurabh runs an 11-month-old apparel firm. He understands the basic rule of business — little or no debt. Yet, he is overburdened by loans — gold loans, credit card loans and soft loans from family and friends. Paucity of funds may not have dampened his spirit — at least, not yet  — but tens of thousands like him who dream of making it big struggle to raise funds, even as they starve for mentorship. “When will the angels descend?” they wonder. Often, they fall before the angels arrive. “Inability to raise funds at the right time can sound the death knell for business,” says Ravi Kiran, co-founder of Venture Nursery, an angel-backed startup accelerator.

Contrary to popular belief, angel investment in India is stuttering, at best. According to Chennai’s Venture Intelligence, an average of just 25 deals materialised between 2008 and 2010. That number nearly doubled to 45-50 deals a year in 2011 and 2012. In the US, 66,200 startups got angel investment in 2011, according to the Center for Venture Research at the University of New Hampshire. In the UK, the over 10,000 angel investor community funded about 3,000 startups. In Israel, 1,500 got angel and early-stage venture capital (VC) funds.

For decades, angels have been the most vital cog in the entrepreneurial ecosystem in the West. In the US, for instance, 2011 saw over $20 billion in angel funding, says the Center for Venture Research. In China, angels invest $700 million annually. Despite a growing population of high networth individuals (HNIs), angel investments are at a nascent stage in India. Less than 500 investors put in Rs 100 crore (about $18 million) annually. Angel investment accounts for barely 7-8 per cent of the annual early stage investments, against 75 per cent in the US. The gap between VC and angel funding is huge in India, with angels at $20-25 million and VCs at $1.2 billion in 2011; in the US, VCs stood at $25-30 billion, marginally higher than angels.

Why so? One argument is that organised angel activity in India began only in 2006. And most investments come from a handful of  groups: Indian Angel Network, Mumbai Angels, Chennai Angels, etc. Angels are rich individuals who have made their money in other businesses, and fund startups on the basis of promising ideas. Besides providing capital, angel investors also offer mentoring and network access to entrepreneurs. They play a critical role in scaling up startups to make them attractive for institutional investors such as venture capital funds.

An angel is very different to a VC fund, which raises resources from others and manages a fund as professionals. Angels invest in their individual capacity. “They come in where risks are high and business parameters are not set,” says Mohit Goyal, co-founder of the Indian Angel Network and member TiE, a network of professionals fostering entrepreneurship. 

“The situation is pathetic,” says Rajesh Sawhney, an angel investor and founder of the Global Superangels Forum (GSF), referring to the widening gap between the needs of startups and funding by angels. “While the supply of entrepreneurs is better, financing for early stage companies is still very bad.” By GSF’s estimates, 50 companies last year raised seed financing and only 200 raised money (Rs 10-50 lakh) from family and friends. Sawhney says over 1,000 deserving firms need to raise between Rs 50 lakh and Rs 5 crore.

Startups typically need angel funding when they develop a prototype and need to create a proof of concept. They may need money to hire people, technology and for travel. All of which suffer due to a paucity of funds.

That, in turn, takes a toll on the entrepreneurial ecosystem. Industry veterans say 90 per cent of new businesses fail within the first five years — most due to lack of early stage funding and focus. The rate of failure is high in developed markets too, 50-60 per cent, where more than insufficient funds, poor execution plays the villain.

The Endless Wait...
Atul Agarwal does not miss an opportunity to attend an investor forum. You will find him at TiE conferences, Google’s entrepreneur meets at pubs such as Delhi’s Blue Frog, even at investor consortia or startup leadership programmes at Delhi’s American Center. The 30-year-old founder of Teesort, an e-tailer of customised T-shirts, is desperately learning to pitch for angel investments. The likes of him nurse a long list of grievances against angels.

“I am not a momentum investor. I invest in people, for long term. I look for exceptional founders in startups: founders who have a vision, a strategy to shape the vision, and the capability to implement it. Next in my evaluation are innovations in product and size, scale and scope of the opportunity. While I admire most of my startups, I would like to give an example of Ravi and Sharat of Mobstac. I invested in them when they had just a prototype and one customer. Mumbai Angels and Accel Partners provided them further capital. They have a vision to build a global scale mobile Internet firm and have since built a number of mobile products for millions of publishers, and have even partnered with Google. If possible, I would stay invested in them forever.”
RAJESH SAWHNEY, angel investor

“People do not invest in ideas in India unlike the US. A lot of business calculations are done even before writing the first cheque — what is the market size, what will be the valuation in one year, how much revenues you earn, what is the customer base...,” says Rana Atheya, founder of Dogspot, a petcare portal. Atheya, like many of his peers, believes angels here follow VCs, which defeats the very purpose angels stand for.

“When I approached VCs, they told me the market was small and I need to go to angels. When I contacted angels, they asked me what the VCs were saying,” says Atheya. For him, it was a wait-and-watch game till this month when, after a two-year wait, he closed angel funding, with foreign investors, though. On the one hand, VCs refused to fund an industry that was barely Rs 1,000-1,500 crore in size; nine out of 10 angel investors — including some avid dog lovers — shied away saying they needed to see higher revenues in the business. “If I had the money, why do I need angels?” asks Atheya.

“Their risk appetite is very low. Angels will tell you to get some traction in the business, to show promising revenues,” says Pradeep Singh, founder of two-year-old startup Gapps Softwares, which makes enterprise mobile apps.  “It took me 10 months even when I had my product and team ready. I had an established business, had customers like Yahoo and many more in Canada.” Even the time taken to close a deal is too long. Anand Ladsariya, an angel investor who became part of the Mumbai Angels four years ago, feels fund-raising in India takes around six months or more. “In developed markets, it happens within weeks,” he says.

It is a chicken and egg situation. You need the money to reach a certain scale and the money from investors comes in when the business has reached a certain scale. “Early-stage investors are scarce in India, compared to Silicon Valley,” says Anilesh Seth, founder of Krow, a firm that offers flexible jobs. “The market is very crowded. Unless you prove your business, it is hard to raise money in India,” echoes Teesort’s Agarwal.

Hyderabad Angels, which was formally registered in June 2012 but has been operating as an informal group since early 2011, confirms that it does not consider very early stage businesses. “We do not look at ideas on paper. A company should have some traction to qualify for our parameters of investing,” says Srini Koppolu, its president. “Many incubators are coming up in India, helping on-paper ideas,” adds Koppolu.

The Expectations
And then there are a few exceptions to this lot. Those who have a more established network and are part of IIT or IIM alumni networks find it easier to get funding. Like Amit Naik, an alumnus of IIM Lucknow and co-founder of in Mumbai, or IIT Kanpur alumnus Janardan Prasad of Pune-based “For us, it was not that difficult,” says Naik who tapped into his alumni network to raise money. He is very close to a deal. His pitch too, like many others, was rejected by many angels who doubted his online grocery business model. Despite a strong network, Naik feels that the turnaround time of angels and such networks is “very, very long” and that there is no transparency in how they work. “In a startup, every day is crucial. After applying to some of the angel groups, we did not hear from them for months; we had no idea what was happening to our applications.”

Indian Angel Network’s president Padmaja Ruparel points out that the group has investments in companies at different stages. “Since we are a larger group, we have different risk appetites. Some come in at a later stage of the deal and some at earlier stages where the risk is higher but amount invested lower.” is one example where the group invested very early — in the pre-revenue stage of the business.

Half Empty, Or Half Full?
Depending on who you are speaking to, investors and angels both throw barbs at each other for the current state of affairs. Ask the investees and they have a long list of grievances. Ask the angels and they will tell you that the ideas and deals are simply not good enough.

The Indian Angel Network received about 5,000 applications in 2011. Of those, only 50- odd ideas were presented before members. Of them, only 11 were funded. “There is a shortage of quality deals. We still see me-too kind of models. There is no real innovation happening,” says Hemant Kanakia, who has been an angel investor in the US for five years and has been investing in India for two years. So far, he has invested in 12 firms, with funding ranging from Rs 5 to Rs 15 lakh per firm. On the contrary, Rohtash Mal, an angel with investments in health, education and agriculture,  says that the quality of Indian entreprenurs is good.

That said, the process of scanning these applications and the matrix used is not known to the world outside the angel investment groups. “It is not a straight-jacketed criterion. It is a process of rejection more than selection,” explains Sushanto Mitra, director, Hyderabad Angels, which started operations in June 2012.

“The ideas mostly tabled before our group are the ones which have already seen some traction; it is very rarely that we come across a business which is in its infancy,” says Rajeev Arora, a member of the Mumbai Angels Network.

“Angels do not have a matrix for measuring risk and they do not have a risk appetite and thus they start behaving as VCs more than angels,” says Shekhar Chandra, a serial entrepreneur whose first venture — Tensor Technologies, a personalised search engine — had to shut shop due to a shortage of funds.

Chandra had approached VCs, but since the amount being raised was between $500,000 and $1 million, he was directed to angel investors. Chandra chose not to accept angel money as he felt their thought process was not aligned with his and because angels were coming in with unreasonable expectations.

Chandra is not alone. Several Indian entrepreneurs approach VCs rather than angel investors. The big reason: there are only a handful of angels who want to take high risks by betting on just a team and an idea that is still on paper. By the time Delhivery, an e-commerce logistics company, got its first term sheet from angel investors, it realised that it needed even more money to sustain the business. While the company was looking to raise $1-$2 million, angels were not ready to offer more than $500,000. “They did not realise that we are a back-end firm and not a tech startup, that we would have burnt the money in 5-6 months,” says Sahil Barua, co-founder of Delhivery.

“After spending 17 years in the us, I had no inkling about the angel landscape in India; SO when I started Greendust, my first recourse was to reach out to VCs. But I was in for a rude shock when I realised VC funding comes at a very high price — in the form of equity. That is when I was introduced to Sasha and Mumbai Angels. By August 2008, we had a term sheet, but then the recession hit the world and the paranoia forced even HNI angels to hold back. Sasha advised me to close the term sheet fast and start execution to demonstrate the power of the business model. In October, we started the firm with Rs 60 lakh as seed investment. Four years on, we are now looking at touching over Rs 300 crore in revenues and the market leader position.”
HITENDRA CHATURVEDI, founder and CEO, Greendust

Money was not the only problem. Barua realised investors will not be the mentors that he expected them to be. “Angels in India do not bring anything to the table. Only in rare cases do they add value,” he says. Barua has company in Sawhney who says, “A firm should be careful in inducting angels as board members and the time horizon that an angel should come in with should be clearly drawn out on the basis of what value he adds to the business — can he open  doors with his contacts, can he help build strategies? “In India, angels demand a controlling stake. In the West, they do not insist on taking control and mostly cash out when the next round of funding comes in,” Kanakia says.

Demand for a higher stake for a small amount was the reason why Archit Gupta, co-founder of ClearTax, a tax filing firm, avoided taking angel money. “They ask for so many rights and want to gradually steer the business. They forget that the word is angel and not investors,” Chandra says.

Where Angels Fear To Tread
According to a study by consulting firm BCG, India has at least 190,000 multi-millionaires. But there are only 500 angels. The vast disparity is explained by the lure of real estate for the rich. It is one of the few sectors where black money and unaccounted cash can still be invested in and profited from. “When I approached investors to raise funds for YourNest Angel, I had to educate HNIs that there exists an asset class where you can invest money in startups,” says Sunil Goyal, CEO of YourNest. “People are not aware. They sit on money and only invest in real estate.”

While there are no concrete numbers available for black money in India, in May 2012, the then finance minister Pranab Mukherjee stated that the total liability of Swiss banks towards Indians (by end-2010) was 1.9 billion Swiss francs (approximately Rs 9,295 crore). In 2010, US-based Global Financial Integrity estimated that $462 billion went out of India between 1948 and 2008.

Ask them about their love for real estate and the HNIs will tell you that it is a better bet than entrepreneurs because India is yet to see success stories (100x returns) such as Facebook, Google or Twitter, for instance. That is critical to what Conway calls his “spray and pray” strategy, which implies investing in a number of companies and hoping that some of them will make enormous amounts of money.

This, even though angel-invested firms such as InMobi, Greendust and Druva have fetched investors handsome returns. Druva delivered 11x returns to the first round of investors in 42 months, Web Clipper generated nearly 6x returns in 15 months and InMobi 25x. “Entrepreneurs should understand that exit is important to the investor and that too with a certain multiple; they should share the same vision,” says Suresh Kalpathi, co-founder of Chennai Angels.

“It is the evolution of the ecosystem. Unless you get successful entrepreneurs and they become role models, students and youth do not get passionate,” says Hemant Kohli, a serial entrepreneur and the CEO of an online book store “So, you need more successful role model and more successful exits to have more investible startups and more investors.”

Echoing Kohli is Ankur Warikoo, India CEO of Groupon. “India is still in the catching-up stage when it comes to entrepreneurship; it is still building ideas that have been proven in the West and trying to replicate them in India.” Among the few who have managed to cash out through exits is co-founder of Mumbai and Bangalore Angels Sasha Mirchandani, son of Mirc Electronics’ chairman Gulu Mirchandani. Out of the 30-odd investments he has made in 8-10 years, he has had 10 full and partial exits. InMobi, Greendust — a reverse logistics company — and e-shopper Myntra are a few feathers in his cap. “There have not been too many exits that would have created tonnes and tonnes of wealth to be ploughed back,” says entrepreneur-turned-investor Gaurav Kachru, who has recently started an early-stage fund 5ideas to mentor startups.

The other reason for such a shortage of angels, according to Sawhney, is that unlike the US where there have been large cashouts, in India a majority of angel investment is still locked up in companies. Not to forget the fact that the inflow of new angels may be hampered because most of the second and third generation entrepreneurs in India are traditional businessmen who do not understand the digital or technology space. Given that 80 per cent of the startups are in these areas, they are inhibited from bringing their money into the tech domain.

Clamour For Tax Relief
Eventually, of course, even the dearth of angels is being blamed on everyone’s favourite punching bag  — the government. The private sector abhors government role in business, but does not mind seeking incentives. Angels demand that the government introduce a set-off on taxes on their investments. Israel, for instance, allows investors to set off 50 per cent of the investment in a firm against that year’s taxes. In the US, tax incentives range from a 15 per cent break on funding in Colorado to 100 per cent in Hawaii.

Angels also say they are constrained by regulations that make both investing and exits cumbersome. In Budget 2012, the finance minister proposed that when the money invested in a company is higher than its net worth, it should be taxed as revenue.

“Angel groups protested against it, so the government tweaked it saying all recognised angel networks will be exempt. But what happens to the guy sitting in Bathinda or Panipat who has the money and the will to invest in startups?” asks Raman Roy, a serial entrepreneur and an active angel investor who co-founded Indian Angels Network. Roy has invested more than half a million dollars in 12 companies since the start of the network in 2006.

Agrees Puneet Wason, an angel who has invested in 10-12 startups in the past four years: “As an organised sector, the sheer number of angel investors will only go up when the government starts giving tax breaks for losses, which is a norm in other countries such as the US and the UK. You will see a lot of risk capital come in.”

Goyal of YourNest Angel suggests that permitting pension funds, insurance funds and provident funds to invest a small part of their corpus in early-stage venture funds could also significantly improve capital flows.

Their pleas, it seems, have not fallen on deaf ears. “Special incentives such as tax credits could be provided to HNIs, corporates and institutions that invest in early-stage venture funds, or to incubators and angel investors,” says a report by the Planning Commission (‘Creating A Vibrant Entrepreneurial Ecosystem In India’, June 2012). “Banks must also be encouraged to invest in early-stage venture capital funds by treating such investments as ‘priority sector’ funding without capital market exposure and provisioning norms being applied.” The report has been submitted to the government for consideration.

Meanwhile, angel investors also grapple with the biggest bane of corporate India: where closing a company is tougher than starting one. Closing a company requires far more approvals than opening one. As a result, angel investors do not write off investments even though the business may have shut shop. “A policy framework for easier exits and fiscal incentives on capital gains will encourage early stage investments by angels and others,” says Ruparel.

Without a flourishing entrepreneurial landscape, India may well kiss its chances of sitting on the high table of global economies goodbye. And entrepreneurs cannot flourish without a heavy influx of angels. Well-wishers would hope the twain shall meet. Somewhere. Sometime.

(This story was published in Businessworld Issue Dated 19-11-2012)