The pioneers of Indian angel investing are now getting into the venture capital game

Leading the way.
Leading the way.
Image: Reuters/Vivek Prakash
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In 2006, India’s startup scene was almost non-existent. Flipkart, currently the country’s biggest unicorn, had not even set up shop, and names like Softbank and Tiger Global were hardly known. Those few experimenting with new technologies depended on friends and family to play angel investors—individuals who provide capital in exchange for equity—with deals often sealed over dinner-table conversations.

But a group of six entrepreneur-turned-angels sensed the impending startup boom and the need for a structured platform for angel investors. Besides aiding Indian entrepreneurs, they aimed to make angel investment a formal asset class for high net worth individuals (HNIs).

Over a decade later, the Indian Angel Network (IAN), the country’s oldest such group, has 450 investors from 11 countries. This includes prominent names like Google India head Rajan Anandan, HCL co-founder Ajai Chowdhry, Everest Flavors managing director Anand Ladsariya, and Alok Mittal, the former head of venture capital (VC) firm Cannan Partners.

Since its launch in 2006, the IAN has backed over 100 startups across 17 sectors. Its portfolio includes one of the world’s biggest data-protection startups, Druva Software, Mumbai-based lingerie website Pretty Secrets, and Chennai-based Uniphore Software Systems, all of which have gone on to raise more funding from VCs.

Over the years, the IAN has also expanded abroad, investing in the UK and Israel.

Early days

Back when the IAN was set up, entrepreneurs were few and far between, mostly inspired by the likes of Infosys’s NR Narayana Murthy. But even then, there was a funding mismatch: Early-stage entrepreneurs needed to raise small amounts while the handful of existing VCs wanted to plough in big bucks, said Padmaja Ruparel, a co-founder of the IAN.

“The gap in the ecosystem for new startups was at half-a-million dollars…Entrepreneurs didn’t have the next Rs2 crores ($0.3 million) or Rs3 crores to take the startup to the next level,” Ruparel said. “While VCs were screaming about too much money and too few deals, there was no pipeline of companies which could consume VC money.”

Bank loans were out of the question as startups neither had collateral nor successful business models.

So, that gap was filled by the IAN.

It became a conduit between young startups and HNIs, mostly non-resident Indians (NRIs). Among other things, it conducted pitch sessions, where entrepreneurs presented their ideas and investors in the IAN picked their choice.

While angel investing as a concept existed even earlier, IAN gave it structure, which was good for the overall ecosystem, said Yugal Joshi, an analyst with IT consulting and research firm Everest Group. “What these kinds of forums did was educate the broader market that India isn’t only a back office country but an innovation market as well,” Joshi said. “It makes people, who are planning to start up something on their own, more confident of themselves. Earlier that was not the case.”

Today, the IAN follows the same model, with investors putting in as little as Rs5 lakh into a startup. Yet, it’s not just the low entry barrier that’s the key. The other benefit of investing through the IAN is taking investment decisions in consultation with sector experts. “A lot of it is based on trust, and as you invest more you build the relationship of trust with a lot of (IAN) members,” said Nitin Singhal, an NRI based in London, who’s been with the IAN for over eight years now.

The model has delivered: The IAN currently has an internal rate of return of 32% for its investors. And having aced the angel investment model, it’s ready to take on a new avatar.

Playing the VC game

In April this year, the IAN launched a VC fund, IAN Fund-1, with a corpus of $70 million (Rs450 crore). Around $33 million has already been raised and the fund has begun investing.

The IAN Fund-1 focuses on early-stage startups and invests between $1 million and $5 million in each round. Over the next four years, it is looking to invest in over 100 startups in sectors like machine learning, artificial intelligence, agriculture, health tech, and cyber-security.

We realised in the last year or so that the half-million (dollar) investment is here to stay. The gap in the market we are seeing is that good companies are falling off the cliff because they’re not able to raise the next $1-5 million,” Ruparel said.

While it is at the top of the angel investment game in India, the overcrowded VC space will be a different challenge for IAN. Unlike individual angels, funds typically are under pressure to get access to promising startups, said Zishaan Hayath, an angel investor and serial entrepreneur.

“It will boil down to how founder-friendly and helpful are you,” Hayath said. “They’ll have to deal with a lot of unknowns as businesses are very early-stage and chaotic. That will mean stressful times for both founders and investors.”