Angel networks allow people to make collective investments and bring quality startups to their table
Illustration: Ajay Mohanty
Padmaja Ruparel, co-founder of India Angel Networks (IAN), gets monthly at least four emails from people wanting to join in. Startups were buzzing in India, but the Covid-19 pandemic has accelerated the process of individuals wanting to invest in them.
“When we started IAN in 2006, startup as an asset class was available to only the ultra-high network individuals (HNIs). Then angel network had people who were entrepreneurs themselves and had made money. Today angel investment is an asset class having high risk and high reward equation. Now HNIs and individuals both have access to invest in them,” said Ruparel. IAN, one of the oldest angel networks, started 2020 with 490 investors and it crossed the 500-mark in 2021.
Take the case of Inflection Point Ventures (IPV). The angel network started 2020 with around 1,200 investors, and it had 3,500 by the end of the year.
IPV attracts investors because it makes early-stage investment available to individuals and uses scientific logic for its investments. Its success comes as retail investors realise that traditional public markets are longer risk averse.
Angel networks allow people to make collective investments, bringing to their table quality startups. Debt investment are risky and may give low returns, gold investment lacks standardisation, and in real estate pay on single big-ticket investment. CXOs and entrepreneurs are therefore joining angel networks for better returns.
Ruparel believes that investors who are interested in startups but do not have the understanding of running a company should ideally join peer and promoter-driven network.
The pandemic also made these angel networks become savior to startups as several VCs refused to sign cheques.
“Our investment during the pandemic was fuelled by logic. We knew this was the time when we will get to invest in reasonable valuation businesses because there are not many people chasing the deals and anyone you fund now can give them a 12-18 months runway,” said Ankur Mittal, cofounder, IPV.
With more cash coming in because of a larger angel base, the platform has the power to write bigger cheques now. “Since about 60-70 per cent of our investments are above half a million dollars, our due diligence has become more stringent,” said Ankur Mittal, cofounder, IPV. Existing investors have also started increasing their cheque sizes from Rs 2.5 lakh per startup per investor to over 7.5 lakh per startup per investor.
IPV, which has invested in around 60 startups in three years, will be investing in 55-60 more companies in 2021.
It has already set up a Rs 155 crore fund for this. IPV has already done 12 deals in January and February this year.
IAN’s Ruparel agrees with Mittal. “We saw that founders are now raising 15-20 per cent more than what they would have raised earlier. So yes, the cheque sizes have gone up but then a lot of co-investment too is happening,” she said.
The pandemic also changed the due diligence process at these angel networks. Angel investment is all about taking bet on the founders than the business plan, with no physical meeting and travel at a standstill, these angel investors have had to device ways of deciding on the founder.
At LetsVenture, the base criteria to evaluate startups for funding hasn’t changed but they are looked at more from a sustainability perspective. “We have started focusing more on the grit of the founder and the company to see if they will be able to flip if something goes wrong,” said Sunitha Ramaswamy, President, early stage, LetsVenture. The companies which pivoted during the pandemic and were able to prove themselves had more interest from investors, she added.
After a lull of a couple of weeks last year after the lockdown, the platform signed close to 105 deals across early stage and growth stage startups as compared to 55 in 2019. The platform also saw 45 per cent angels coming onboard last year who were new to the asset class. It has already done 24 transactions this year and is hoping for more deals as compared to last year.
According to Sushanto Mitra, founder and CEO, Lead Angels, the due diligence process has changed. With meetings being hold online, closing deals has become quciker. “The focus is still on betting on quality founders, but there are other issues too. Such as, do the founders have the ability and plan to pivot, importance on cyber security, legal aspects are all online. This is turn allows us to spend and give more time to startups,” added Mitra.
At IAN, due diligence is handled by partner ecosystem. “Since we cannot travel and there are a few things that need actual check, we have created an ecosystem of due diligence people who quickly check on the infrastructure and other aspects independently,” said Ruparel.
IAN is also making its investee companies make use of digilockers so that documents are scanned and in digital format.