Angel investor or VC? Whom should you approach?

Vinod Keni

It is no secret!  Entrepreneurs need cash, and invariably, they end up approaching the 3Fs - friends, family & fools!  The amount raised is small, typically less than Rs. 50 lakhs.    Angel investors sometimes invest at this stage too.  This will help the entrepreneur develop the business plan and test the concept on a limited basis.   

Angel investments in India are evolving, and the number of members joining the major angel groups, Indian Angel Network (the author is a member of IAN) and Mumbai Angels is increasing rapidly. In addition, informal angel investment groups have spawned all over India, including the Tier II cities. 

These investors have been backing startups, providing advice, and helping these companies scale and grow.  The big question facing any entrepreneur is this: “Should I raise capital from an angel investor or from a venture capital fund”?

Angel investors are the bridge from the self-funded stage of the business to the point that the business needs the level of funding that a venture capitalist would offer. Funding estimates vary, and it is rare to find an angel investing more than Rs.1 crore in a company.  The most effective Angels help entrepreneurs shape business models, create business plans and connect to resources - but without stepping into a controlling or operating role. Often Angels are entrepreneurs who have successfully built companies, or have spent a part of their career coaching young companies.  Before approaching an angel investor or an angel investment group, it is important to know the difference between angel and venture capital investor.

• Angel Investors
o Typically HNIs who have been successful entrepreneurs, businessmen who invest individually or as a group
o Invest their  own money
o Invest lesser amounts of money; rare to find angels investing more than Rs. 1 crore in a company
o Quick decision making with regard to investments
o Degree of involvement varies from active involvement to a hands-off approach
o Real world advice and assistance to entrepreneurs
o Simpler deal terms and sometimes, more generous valuation of companies
o Will tend to invest very early – pre-seed/seed stage, and fund proof of concept

• Venture Capital Funds
o Venture capitalists are institutional investors; they manage institutional and group funds and invest in companies as a business. They are answerable and responsible to their investors or LPs.
o Typically make larger size investments, though in recent times, there are several early stage funds that are smaller and emulate the characteristics of angel investment groups.
o Longer time to make a decision with a lengthy due diligence process
o In a better position to provide multiple rounds of funding as company grows.
o Will invariably insist of certain members of the management team being individuals chosen or approved by them; will have to give up a greater degree of control to the VC.
o Most venture funds will expect the proof of concept to be completed successfully.

Angel investors unlike venture funds tend to be low profile and not easily recognizable.  Though the number of angel investors has swelled in recent times, and there are several stories about them in the media, it is still challenging.  The organized groups like IAN & Mumbai Angels have websites that list their members, and several also have individual websites as well.  They have had had considerable exposure to early stage companies from both the entrepreneur and the investor vantage points. They are attracted to the challenge of startup companies that offer promising growth opportunity and in which they can contribute their experience and knowledge.  They all share one common element and that is the desire to invest in new ventures.
Now the million dollar question! How do you find an angel investor?

Network, Network, Network!

Angels are not always easy to locate.  To reach a number of them, and be successful you need to do a lot of business networking.  Make it a habit of getting your name and your face out there and meet as many business people as you can. Many business owners have experienced the same challenges you are facing and may want to help. Consider all of them potential angel investors and even if they aren’t, they may know one. Getting the word out in your community and business network maximizes your chance of getting an investor referral.

Look for Angel Groups

There are several formal and informal angel groups functioning in India. They have websites and are present in conferences and networking events.  Their members attend conferences and speak and write in journals and magazines.   There are also several accelerators and advisory groups that work with entrepreneurs and early stage companies.  Approach them and ask for help. Most will gladly help.

While there are some angel investors who invest entirely on their own, many operate as part of an informal network or syndicate where they can pool their resources and share the risks.

Identify and approach domain experts in your field

Domain experts in the field of your enterprise or idea will know other experts and investors. Typically, angels tend to invest in industries and domains in which they have expertise, experience or are familiar.  While this represents your best opportunity for funding, Angels have been known to invest in opportunities outside their knowledge base. When you find an investor do some research to determine what their interests are and how you should approach them.

Know the preferred investment range

Most angels have a preferred investment range.  Why is this important? It saves you from now wasting your time or the investor’s time when the amount you are trying to raise is above or well below the angel’s comfort zone.

Begin your search close to home

Angels for the most part are very territorial and prefer to invest close to home.  Unless they are investing in a group, and a couple of the members of the group are local.  Investors are not only investing in a concept or a business, they are also investing in its people. Most investors have an interest in knowing who the principals of the company are and prefer being close enough to meet face to face with the principals when needed. Another compelling reason is that many angel investors like to play an active role in the business they invest in, so the closer they are to the business the better.

And - go where they go!

Active or serious angel investors interested in finding good companies, will attend most events where they believe good companies will be represented. So to find them ... go where they go. You should make the effort to attend local business networking events.  There are a lot of entrepreneurial organizations like TiE, NASSCOM where entrepreneurs meet others and network.  These types of events are of particular interest to Investors. Chamber events and industry trade shows, technology shows and venture capital events that highlight specific angel investor sessions are always a good idea. Make it a habit of attending these various events and you may find an angel investor or meet someone who knows an angel investor.

So, the key to raising capital from angel investors is to establish a relationship with one or more angel investors so the angel investor can become a champion with other angel investors he or she knows. I know this is easy for me to say and very hard to do when a young company is trying to survive for up to a year while establishing these relationships. But, those who are able to do this, who have dynamite business opportunities, management with experience and business plans that are believable can raise capital from angel investors.

It would be unusual to secure an angel investor in one meeting. These are savvy business people who will work to their own schedule. Assuming that you grab their interest, they will hear your pitch, take away and scrutinize your business plan, return with questions, check facts and references and then, decide whether to give you the money you want at the terms you want. The key to raising money is building investor trust. There is a formula for doing so. The entrepreneurs that succeed in raising capital for their business know the formula for crafting a compelling story that earns the trust and investment of angel investors.

Vinod Keni is a serial entrepreneur, angel investor and the CFO of Aavishkaar Venture Management, an early stage venture fund.  He is also the founder/Chairman of Aquarian Group & Peachtree Capital Partners.  He is a mentor to several early and growth stage companies and member of the Indian Angel Network.  As an entrepreneur, he has started, grown and exited from companies in technology, services, retail and manufacturing.  As CFO, he has led companies through public listings, M&A and buyouts.  His prior experience includes working with companies such as E&Y, Intel, Harvard Pilgrim, VerticalOne, HeadHunter and TDW.  Follow him on twitter.