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    How India's two largest angel investor groups are fine tuning their funding strategies

    Synopsis

    They are aggressively reworking systems and processes for portfolio management, streamlining member signups, deal-vetting, and encouraging members to be more involved.

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    IAN has an ambitious target to fund 500 startups with Rs 5,000 crore of seed capital over the next 10 years. Mumbai Angels has about 100 portfolio companies.
    For India’s growing startup ecosystem, while on one hand there is a lot of untapped money sloshing around to find its place, on the other hand the number of investment opportunities in high-quality entrepreneurs has dramatically increased the last few years. “Often, investors become choosy and so are interpreted wrongly as being slow and cautious,” said Raman Roy, who, besides being a pioneer of India’s business process outsourcing industry, was also among the earliest to recognise the tremendous potential of domestic startups.

    As a member of the Indian Angel Network, or IAN, the country’s largest grouping of early-stage investors known better as angels, Roy made his first investment in a startup called Knowcross Solutions in 2006. Over the next eight years or so, he invested in about 25 startups. Then, as India’s maturing startup ecosystem entered its next phase of growth, Roy picked up his pace of investments. He now has about 50 startups in his portfolio, including Wowmomos and Vienova Education.

    “I made 50% of these investments in the past two years,” said Roy, the chief executive of outsourcing firm Quattro. “One of the reasons for the increased deal activity is that we see a much wider array of high quality entrepreneurs than before.” If there’s renewed enthusiasm among individual investors and angel networks about investing in early-stage companies, there’s also recognition that for India’s rapidly evolving startup ecosystem strategies from a decade ago need retrofitting.

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    IAN, which vets 300-400 startup deals a month, finalised 30 deals worth Rs 125 crore in the last one year. That’s the surface of IAN’s ambitious target to fund 500 startups with Rs 5,000 crore of seed capital over the next 10 years. Its southern counterpart Mumbai Angels, with about 100 portfolio companies, is only second to IAN in terms of scale of operations.

    The scale these networks are staring at as well as the manner India’s startup ecosystem has developed in the past two to three years are forcing an overhaul that both IAN and Mumbai Angels like to fashion up as another stage of evolution.

    “During the early days, there were only two large networks. You were not only getting money but access to the finest brains in the country. But post 2013, a number of micro venture capital funds have come up. Several entrepreneurs now prefer getting money from a single investor when they need a cheque of Rs 1-3 crore rather than have 20 angels pool in their money, which has its own challenges,” said Anil Joshi, managing partner at Unicorn India Ventures, an early-stage fund.

    So what have been the learnings for these mammoth entities? And what is the big change that they are engineering internally to stay relevant and pace up with the times?

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    “It’s an evolution because when we started out nobody understood startups as an asset class. Today, it’s different. The next gap we are seeing in the market is that for startups that are doing well with angel money, it becomes very difficult to raise capital of $1-5 million,” said Padmaja Ruparel, president at IAN, which recently raised Rs 175 crore for its fund that’s targeting a corpus of Rs 350 crore.

    “The fund has come in to fill the gap, to make sure that startups that are performing well have two pots of money to draw from.”

    As more companies struggle to raise series-A funds — or the first round of institutional funding — after angel rounds, IAN has restructured its investment strategy. While the angel network will invest under Rs 6 crore in startups with capital pooled from among its 400 members, it will participate in follow-on deals in its portfolio startups through the IAN fund. The fund will also back startups from outside the IAN portfolio that are raising series-A or larger investments It will contribute up to half of the total amount being raised.

    Besides stepping in to solve the series-A crunch, India’s largest angel groups are aggressively reworking systems and processes for portfolio management, streamlining member signups, deal-vetting, and encouraging members to be more involved. “Now that we have over 100 companies in our portfolio, portfolio management is becoming a large area for us to handle,” said Prashant Choksey, cofounder, Mumbai Angels. “Either there are exits or second rounds of funding happening. Some companies have cash f low issues, shutting down issues, or liquidity issues. We need to put out quarterly updates on what is happening. That is crucial for member satisfaction.”

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    Last year, Mumbai Angels initiated an information governance mechanism to give its members comprehensive and accurate updates on their portfolio companies. “Founders have the temptation of sharing vanity metrics. So, every quarter we are circulating a template across startups to share information on the progress made and operational metrics,” said Sachin Karnik, president, Mumbai Angels. The network publishes a scorecard for startups based on the information filed. This is one way to get investors more involved to maintain vibrancy. There is also an increased focus on educating members on the nuances of closing a deal, and standardising term-sheets.

    “We have figured out that a member network is not just about the ability to cut cheques but also the time a member is willing to invest. It you have a network of members who are willing to invest but not willing to do anything around it, those guys are better suited to be (limited partners, or investors in a fund),” said Nandini Mansingh, who has invested her personal money in about 10 startups. Mansingh took over as chairperson of the board of investors at Mumbai Angels about six months ago to ensure a single line of reporting for members and faster decision-making.

    The group is increasingly focusing on getting members to learn angel investing as a craft, be generous with their time, lead deals, as well as offer their expert views on different industry verticals that the group’s portfolio startups operate in. The biggest change by far has been the way these networks, which between themselves see close to a thousand deals a month, go about the initial screening as well as the final vetting process.

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    IAN, which increasingly gets proposals in diversified areas including biotech, semiconductors and medical devices, has ramped up its diligence team to do more stringent checks on startups on various counts, including intellectual property claims by entrepreneurs. Earlier, the group used to depend on its members to involve themselves in half of such work,including checks on market size and competitive analysis.

    “Now, we are putting more effort so that 80% of the diligence is done by the team. So it is like presenting a baked cake to the angels for them to put the icing on. We now only ask them to make a couple of calls for a reference check or to ask if something is really a pain point in a sector,” said Ruparel. IAN is also conducting stringent diligence on startup teams’ capabilities even before they make their pitches to the group. Earlier, that used to happen post the formal pitch session.

    Mumbai Angels is changing its metrics on how many members see a deal at the initial stage. While earlier only 1% or 2% of its members would see a deal before it came to the board, the network is now trying to increase that to about 12% of its members. This is to ensure that a deal gets the initial buy-in from a larger base of members.

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    “Opening up a deal to a wider base also helps better identify who can be a good lead investor to negotiate with the company and mentor it. That is a very critical factor for success for any network,” said Mansingh. By far the biggest challenge remaining for angel networks big or small is maintaining the quality of deal f low and commanding exclusivity.

    That is one of the reasons why smaller networks like Powai Angels Network have not been able to go far. As the ecosystem has evolved, early-stage entrepreneurs are spoilt for choice and can hop from one network to another for better deals. Also, several investors are part of multiple angel groups. So the edge of exclusivity wherein networks could bar entrepreneurs from talking to other networks for a certain amount of time is now an old world thing.

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    Now, the strength of a network depends on how quickly it can close a deal, which again depends on the number of members it has and how quickly they are willing to write cheques. “Although the investor brand name and valuation are big areas of consideration for young entrepreneurs, for most entrepreneurs raising funds for the first time often the speed at which capital comes in takes preference over other factors,” said Devendra Agrawal, CEO at investment bank Dexter Capital.

    But sometimes, speed comes at the cost of quality, warned Mansingh. When it comes to deal f low, the key challenge the big networks face is competing with the micro venture capital firms that have come up in the last two years. “There is a decent number of early-stage funds in the country now but all they will invest in is, say, 20-odd companies during their commitment period. That is not enough for a growing ecosystem,” said Ruparel.

    “IAN over the last nine years has invested in 104 companies across 17 sectors. We have a much bigger role to play.
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