Apoorv Ranjan SharmaVenture CatalystsDespite a slowdown in VC funding, the angel and seed investment landscape in India has witnessed an exponential growth in 2016. Nearly Rs 113.6 crore have been raised by tech startups in the country through 69 deals so far this year, marking a year-on-year growth of 62 percent in overall deal value and 47 percent growth in the angel investment volume. This growth has largely been led by the rising prominence of several angel investment groups as well as accelerators, incubators and innovation platforms in the country. These networks act as a buffer between angel investors and entrepreneurs and help in facilitating early-stage investments into upcoming startups. But while angels across the country seem to be having a ball, one question is bound to cross your mind, whether you’re an entrepreneur or operating your own investment network, sooner or later – what drives these early-stage investors, money or power?
Moneyball: It’s all about the money, initially
It is a common perception that investments into startups are all about the money, and, to an extent, it is right. To say an investment is made without an end-goal of making a profit will be patently false. Investors typically expect returns on their investment deals, and angels funding upcoming business ventures are no different.
The high net-worth individuals in India have traditionally invested in equity, real-estate, artwork, collectibles, and precious metals such as gold and silver. startups, with their high-risk, high ROI proposition, have emerged as a viable alternative asset class for these HNIs, who hope to generate higher returns through investments into the entrepreneurial sector. This growing involvement of the country’s HNI segment as angels for budding ventures is underlined by an increase of nearly 100 percent in the number of early-stage investors active in India.
Guiding the Angels: Challenges in early-stage investments and their resolutions
However, many business experts and first-time investors looking for an opportunity to invest in promising ventures often face several challenges during the initial phase. These challenges crop up invariably because these newly-turned angels, in their focus on deriving the maximum value for their investments, lose sight of an important detail – that investing in the world of startups is very different from investing in listed entities.
It is well known that nearly 95% new startups end up failing for some reason or the other. The idea behind a venture might not be disruptive enough, or the sector in which it operates might be ultra-competitive with several larger, more established players. There have even been cases of start-up ideas which have shut down for being too advanced for their time and for their target markets; the innovations they brought in held immense potential and even gained decent traction with users, but failed to survive due to a lack of auxiliary infrastructure that could support them. This makes for an extremely complicated risk-reward equation for startups investments, something which first-time investors are usually not aware of.
But while not every venture can become another Facebook or Dropbox, there are still several startups with a decent shot at growth and success. Identifying startups which represent successful investment opportunities, however, requires in-depth insights and business viability analysis, something which might seem impossible given the lack of data available for early-stage companies.
This is where angel networks and investment enablers come into the picture. By conducting a thorough vetting of a prospecting investee, these platforms provide angels with concise information about a venture, thereby increasing the chances of greater returns on their investments. Each and every aspect of a prospective investee is examined in detail, be it the business model, innovation quotient, market acceptability, competition, future growth potential or ease of scalability. The adoption of tech is also a major factor which can help in swinging the investment decision in favour of an early-stage start-up, as can the strength of the founding team behind it.
These platforms also tutor their angels on how to identify which startups might hold the most promise from an investment perspective, and how to gauge the disruptive potential of a new venture. Additionally, angels benefit from learning the fundamentals of start-up investments and the ‘how to’ of successful exits, which helps in realising the value of their speculations.
The Powerball: gradually transitioning towards fostering growth and innovation
There is generally a lock-in period of 60 to 72 months for any angel investment before it can be expected to generate returns that will be proportionate with the risk involved. This timeframe also gives angels the time needed to understand their investee ventures in greater detail and fosters a commitment to actively contribute in driving the success of the business. Such involvement and the subsequent successful exit grant angel investors with experiences and insights that they can use for future investments in the start-up community.
A mindset to foster innovation is developed as a result, ultimately benefitting not just angels and the investment community, but also the overall entrepreneurial landscape. Money is power, and with great power, comes great responsibility. This is what makes investments into startups so much more than just a convenient moneymaking option.The author is Co-founder and President at Venture Catalysts.
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