Angels Hold Steady Amid Funding Winter

"YEH SAB DOGLAPAN HAIN" (all these are double standards) or "Zara saral tareeke sey samjhayiye" (please explain in a simpler language) — dialogues such as these from business reality show Shark Tank India have been as popular as those from some blockbuster movies, resulting in countless memes. But what it has also done is to give a sneak peek into the process of raising money for business/business ideas and the concept of angel investment itself, which till sometime ago was a business jargon.

Angel investment today has turned out to be a glamorous asset class that individuals, not just the ultra wealthy, have their sights on.

The Indian start-up ecosystem, which saw easy money flow till 2021, has been in a funding lull since the last 12-18 months. According to a recent report by global consulting giant PwC, Indian start-up funding stood at $24 billion in 2022, compared with $35 billion in 2021, a 33% decline year-on-year. Early stage deals, however, bucked the trend, accounting for over 60% in volume in both years. Early stage funding was 12% of total funding in 2022, against 7% in 2021, the report says.

Since early 2000, Indian angel investors have been playing a key role in these early stage deals, which are a result of equity dilution at seed or pre-seed stage. And despite private equity and venture capital money becoming sparser, seed-stage investments have been consistent in the last eight quarters even in the face of adverse macroeconomic conditions (See graphic: Angel share in seed-stage deals).

Share of angel investors' participation in seed-stage deals has been between 46% and 56% (except Q22023 when it was 38%), with nearly 75% of total seed-stage funding during that stage. "In the tech start-up space, there has been a lot of education happening in angel investing in the last two-three years, largely led by micro VCs with preference for B2B SaaS companies, and the Bharat pool focused on companies built on the Aadhaar, UPI stack," says Atit Danak, partner and head of Zinnov CoNXT, a strategy consulting firm. Start-ups in the D2C space have also been attracting a newer pool of angel investors — executives and working professionals with higher disposable incomes upwards of ₹1.5-2 crore, he adds.

Shashank Randev, founder at 100X.VC, a Sebi-registered category 1 fund, which steps in at an early stage for start-ups, also relates to the positive sentiment in the angel investing space. 100X.VC, which has invested $10 million in 127 companies, has seen portfolio start-ups raise nearly $65-67 million in subsequent rounds of funding. Around 30% of the investment came from angel investors directly — individuals, working professionals, active angel networks or family offices, even those from Tier-II and III cities.

"We have seen a significant awareness in this asset class in angels and aspiring angels," says Shashank. With the number of deals seeing a good growth in pre-seed to series A, "the duration of exit cycle has shortened. A founder today can raise three-four rounds in four years as opposed to a decade ago where they went for a single round," adds Shashank. That said, a handful of super angels or ultra-high net worth individuals may want to hold on to their investment for long, but most look at an exit at series A or B, with returns between 20x and 100x, depending on the company's performance.

While wealthy individuals may have turned angel investors today more from the standpoint of portfolio diversification, angel networks have worked at an aggregation level towards bringing the right set of investors and founders together to create value. Even within these networks, there has been a considerable uptick in the number of people wanting to be members and co-investors in angel funding rounds. The networks, with better due-diligence and closer connections with founders bring in industry expertise for those wanting to invest as angels. According to industry estimates, there are currently over 120 angel investors in the country.

Among the early birds, the Indian Angel Network (IAN), which started operating in 2006 with the likes of Ajai Choudhary, Raman Roy, Alok Mittal, Anand Ladsarkiya and Padmaja Ruparel, has taken bets on start-ups such as Wow Momo, Gaadget Wood, Druva, Infinity Assurance and Loginext, among others. While investment is just one part, being able to add value, and guide these portfolio companies to make such angel networks stand out, are the others, says Padmaja. For instance, IAN had backed FarEye, a Delhi-based firm providing mobile-enabled solutions for field workforce management, nearly 10 years ago. The company, which celebrated its 10th anniversary recently, had four people to give the keynote address, and Padmaja was the only one from the investor community to be invited. "Every time they (FarEye) faced a challenge they reached out to us; if anything good happened also, they made sure we knew. How your portfolio companies look at you also becomes important for other investors," she says.

The rush to invest individually in start-ups today has been fuelled by the sector coming of age, compared to 10-15 years ago when angel investors were largely from tech and banking backgrounds with exposure to global, especially Silicon Valley companies. Sharad Sharma, angel investor and co-founder, iSPIRT Foundation, recalls the problems Bharat Matrimony had to face in 2007-08 during its expansion, especially in rural markets. Sharad was an investor and a board member at the time. But now, improvement in public digital infrastructure, new sectoral policies and regulations have led to a level-playing field, though many issues around ease of doing business still need to be addressed, he adds.

Sharad believes faith is the cornerstone of any investment, especially for an angel. "We don't have the infrastructure to do complex due-diligence. The investor's goal is to see the value system of the entrepreneur and find the connection. How is he embedded in his or her network? If you know any of them, they can tell you a lot," says Sharad. For angel investors today, start-ups come with the learnings of failures as well as successes. Not to mention the sectorial choices for investment and geographical focus, which help in better understanding of the risk-reward play, than, say a decade ago.

Start-up funding has also seen first-time founders turn active angels, with an impressive portfolio of companies under their belt. For instance, according to data intelligence platform Tracxn, CRED founder Kunal Shah has invested in nearly 237 companies, including Zetwerk, Mensa Brands and Razorpay. Snapdeal co-founder Kunal Bahl has investments in nearly 187 firms such as Razorpay, Mamaearth, Ola and DealShare, among others. Anupam Mittal, founder of Shaadi.com, has invested in nearly 200 start-ups.

Raman Roy, ITES industry pioneer and chairman and MD of Quatrro, says entrepreneurs turning angel investors can also help mentor investee companies. Raman is a leading angel investor with investments in over 102 companies, including Uniphore. Founders of companies where he has invested do not hesitate to reach out to him on various issues. "Mentoring is very different from running your own company, it's a tricky business," adds Raman.

With instances of lapses in governance or information asymmetry between start-up founders and investors leading to skepticism, for those starting out as angel investors today, curating a deal, getting the right information, understanding and due-diligence are critical, says Raman.

The start-up sector has also seen government initiatives help in early-stage fundraising. Start-up India Seed Fund Scheme, launched by the Department for Promotion of Industry and Internal Trade, with an outlay of ₹945 crore, to provide financial assistance to start-ups for proof of concept, prototype development, product trials, market-entry and commercialisation, which is disbursed through incubators. That said, India remains a land of mostly part-time angels, unlike other markets such as the U.S. or the U.K., and investors are extremely bullish on India. The country's problems offer these companies a chance to build entire business models around it, along with a potential to go global. "What works in India or even a part of India, will work in some other country in the world," says Padmaja.