What should an emerging entrepreneur do to attract the attention of an angel investor?

Sunil K. Goyal, CEO and Fund Manager at YourNest Angel Fund, provides tips on how entrepreneurs can not only get financial assistance but also tap into the expertise of angel investors to scale up their business.

Goyal has a rich track record of experience, having worked with companies such as Dabur India and Bharti Airtel. As Bharti's Chief Operating Officer in 2005, he was instrumental in building the company's exponentially high growth mobile operation in Central India.

Goyal, along with partners Sanjay Pande and Girsh Shivani founded YourNest Angel Fund, a SEBI-approved early stage venture capital fund. They currently nurture angel investments in sectors such as telecom, e-commerce, retail and technology in companies such as appleofmyi, hoopos, ZipDial and Hotelogix.

Excerpts from an interview:

How is angel fund investing different from a regular venture capital or private equity funding?

An angel fund is an early stage venture capital fund that invests in start-up businesses and raises its capital primarily through angel investors, who are typically high net worth individuals. These angel investors also act as mentors while continuing to attend to their business or profession.

Venture capital normally focus on growth stage investment starting from $2 million to say $25 million in an investee company, whereas PE firms focus on larger investment at a later stage of a business. And they primarily raise funds from institutions or are fund of funds.

How has the concept of angel funding picked up in India compared with markets such as the US?

In the US, nearly six lakh angel investors fund over $20 billion a year. The angel funding industry is as big as PE/VC industries. These angel investors fund and support over 60,000 ventures a year.

In India, thanks to Angel Networks such as Indian Angel Network (IAN) and Mumbai Angels, a formal structure started emerging in 2006.

Currently, we have number of angel networks and HNIs who are open to making direct investment in this emerging asset class. Experienced angel investors, to ride the entrepreneurial boom in India, are establishing angel funds, or early stage venture capital funds.

Typically what would be the size of a firm that qualifies for angel fund investing?

The size of the firm in terms of revenue is not an essential parameter for our fund to invest.

At YourNest Angel Fund, we look at whether a product concept is proven, the product/idea meets a real unmet need very effectively, the revenue model has been tested and a team of 5-20 people is in place. Of course, an essential element is that the business is ready to scale up.

Can you name three aspects that an entrepreneur should get right to attract funding from angel investors?

Angel Funding requires multiple aspects that an entrepreneur must get right to attract attention for funding. Besides offering a unique solution and a sustainable and scalable business model, it should have received an exciting feedback from its initial customers. There should also be some validation that the idea really crossed the incubation phase. It is also important that the business can address a large market with opportunity for national or international play. We also look for an entrepreneur who can run the business quite far with this angel funding round.

As I said, at YourNest fund, the amount of revenue is not so critical. The start-up may have just started billing its first few paid customers. For us, it is pertinent that the business exhibits the execution abilities of an entrepreneur rather than just a manager.

Would you fund a firm that is growing on a highly leveraged model?

We do not advice using financial leverage at an early stage of a venture. The inherent risk of start-up itself is high and hence raising debt at market rate must be avoided until scalability of the model is proven. We believe in reducing business risk through our funding and help break even without a debt component.

What kind of investment opportunities will you scout for YourNest Angel Fund?

The start-ups that can be funded by us will normally be six months to three years old. They will have 5-20 people. YourNest is not looking to invest only in profitable ventures. Our key focus is a scalable business preferably backed by use of technology.

We prefer investing only in Round One and add value to the first generation entrepreneur. These could be in the space of marketing services, financial services, technology solutions, telecom solutions, education, healthcare, hospitality, e-commerce, software, and so on

What will be time frame for this fund?

YourNest Angel Fund - Scheme 1, has a term of eight years. The investment period is spread over the first three years. Business build-up and exit is planned over the next five years. Indian companies do need a longer period to scale up and become attractive for a strategic partner, and hence a fund life of eight years.