Senior professionals, moderately successful entrepreneurs as well as high net-worth individuals (HNIs) have been expressing an active interest in investing in start-ups. Individuals who are keen to explore start-ups as an asset class, however, have to recognise that investing in them is a high-risk, high-return game.
They need to get comfortable with the fact that they could lose their entire capital in some of the companies they invest in, and that most of the start-ups they invest in may not succeed.
Anyone who has the ability to spare Rs 5 lakh or above a year — and not lose sleep over it — could look at co-investing in two-three start-ups a year, so that over a two-three-year period, they are able to build a good portfolio.
With a diversified portfolio, investing in start-ups can provide better risk-adjusted returns. Existing angel groups and investors typically invest in start-ups raising upwards of Rs 2-3 crore, as their members do not usually want to write smaller cheques.
As a result, start-ups that could do with between Rs 25 lakh and Rs 1 crore funding find it difficult to get investor attention from currently active investor circles. Small-ticket co-investments by new investors will make it possible to provide capital for a much larger number of start-ups that seek lower amounts of capital than what is provided by existing angel investor groups, but are not able to get it from existing fora.
But current angel networks and investor fora are relatively smaller and closed groups of HNIs and successful entrepreneurs. Entry into such groups is largely by invitation, or on the recommendation of a member. How do individuals who are not currently part of the start-up ecosystem become a part of it?
A few models are emerging. Apart from platforms such as Applyifi and LetsVenture, which help investors discover and assess investment-worthy start-ups, many new investors are forming their own groups and consortia to co-invest.
In Delhi, there is a group of doctors who are coming together to invest in healthcare ventures. The CIO Angel Network comprises HNI chief information officers (CIOs) who have grouped together to invest in technology startups to which they can add tremendous value and perspective. Another emerging trend is ‘alumni angel groups’, consisting of alumni of an educational institution who get together to co-invest in start-ups.
In India, Harvard Angels-India and BITS Spark Angels — alumni from Birla Institute of Technology and Science, Pilani — are excellent examples of alumni angel networks. While BITS Spark Angels looks at investing in start-ups founded by current students and ex-students from that institution, Harvard Angels-India is open to investing in any high-potential start-up. These are typically volunteer-driven efforts with a few alumni members taking the lead in forming the group.
BITS Spark, which has had a very successful run since its inception in 2011, has now grown to over 70 angels in its fifth season of deal evaluation. They have funded eight startups so far, including in Grey Orange Robotics, Solartown and Tabtor, some of which have gone on to raise multiple rounds of funding since.
Much like most business schools and engineering colleges having entrepreneurship cells, it would be great if each of these institutions also has an alumni angel network. Closely-knit fora such as these have the potential to significantly increase entrepreneurial activity in the country.
Emergence of newer angel groups is excellent news for the start-up ecosystem in India. We need to be able to provide capital to thousands of aspiring entrepreneurs so that they can create strong businesses that can create more jobs.
As we create a much larger pool of start-ups, the funnel for Series A and further rounds of capital will also increase. It is about time that the Indian start-up scene expanded significantly from the 300-400 angel investors we currently have to 3,000-4,000 active investors that we need to provide capital to thousands of start-ups — and not just the 280-odd start-ups that reportedly received capital last year.
This article was originally published in The Economic Times.