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Young entrepreneurs finding it tough to raise bank credit are fuelling a growth in angel investors — a nascent sector in India. Numbering about 500 across the country, the angels have usually been entrepreneurs themselves. After selling stock in a profitable venture, they would invest spare capital into new start-ups either individually or as a network.
Angel investments usually target non-capital intensive business, such as start-ups in technology-based sectors like e-commerce, IT, education and healthcare.
“Without a sustainable cash flow, it's tough for a young company to finance a loan. This cash needs to be free for supporting growth instead,” said Ms Padmaja Ruparel, President of the five-year-old Indian Angel Network (IAN). This is the largest such domestic body with about 200 investors.
Small-ticket investments
Such angels with small ticket sizes (from Rs 20 lakh to a few crores) are a blessing for start-ups.
Classified as micro, small and medium enterprises based on their small turnover, they are usually denied loans by traditional financial institutions because of a lack of collateral and high risk — only one out of about 20 start-ups succeeds, though the returns target is over five times, as per an industry estimate.
Though proper industry figures are unavailable, IAN says that angel investments are growing at about 40 per cent annually. Along with the other networks such Mumbai Angel Network, about $45 million is expected to have been invested in 2011. IAN also expects to start a data collection service this year.
“Angel funds are required as the initial operating risk is very high in start-ups, which cannot be multiplied by taking a financial burden. Without a mentor adding value, the probability of a start-up surviving is 20 per cent, with one it is as high as 80 per cent,” said Mr Sunil K Goyal, Chief Executive Officer of early stage private equity firm, YourNest Angel Fund.
Angel investors help by bringing in strategic and operational support, apart from helping in compliance issues. Explained Ms Ruparel: “A technology start-up was looking for a US work visa to expand its business, but was rejected thrice. With the help of some US-based investors, it then managed to get NASA as a client. That base helped it soon open a US office.”
Growing the ecosystem
However, the sector still has about a decade to go before becoming large enough.
“It is unfortunate that this sector is small right now. For the ecosystem to grow, more first-generation entrepreneurs have to exit their primary businesses first and invest 10-15 per cent of their returns in new ventures,” Mr Mahendra Swarup, President of the Indian Private Equity and Venture Capital Association, said.
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