The angels are back. And entrepreneurial activity, too, is picking up. From the last quarter of 2010, angel investments have increased and continued into the first half of 2011. More wealthy individuals are willing to bet their money on entrepreneurs, helping fund their start-ups.

Angel investment, by nature, is a high-risk investment essentially because the angel investors are betting on an entrepreneur whose idea or concept has not yet been tested in the market. The returns, too, can be high if the idea and the product click.

Unlike in the West, angel investment is a more recent phenomenon in India, having started off in a small way around 2006, although there were stray cases of wealthy individuals (or high networth individuals, in angel investment industry parlance) investing or helping to seed fund start-ups.

Investments

Information available shows that in 2006 there were 13 reported deals in early-stage investment with about Rs 10 crore being invested — or an average of Rs 77 lakh a deal. This figure peaked to 39 deals and Rs 16 crore invested in 2008, only to fall the very next year. A better part of 2010, too, was dull as far as angel investing activity was concerned, with some positive signals in the last quarter of 2010.

When compared to private equity or venture capital investments, angel investing is a lot riskier, mainly because the money is going into start-ups, whose concepts and products have not yet been tested in the market. That is also why the deal sizes are much smaller than PE or VC Investments. Typically, angel investors invest between Rs 50 lakh and Rs 2 crore in a venture (up to half a million dollars), while there have been stray instances of angel investors having pumped in more in one single deal. Because of the risks involved, angel investors also look for much higher returns, the lucky ones earn up to 25 times their investment.

Ms Padmaja Ruparel, President, Indian Angel Network (IAN) Secretariat, confirms this trend. The IAN, a network of entrepreneur-turned-angel investors, has closed six deals in the first six months of 2011, against jus two or three in the whole of last year, according to her.

A host of factors have contributed to this pick up in angel investing activity. One, with the economy recovering from the effects of a global slowdown, the valuations are much more reasonable now than they were two years back. There are more opportunities for entrepreneurs to come out with newer ideas and test them and the products in the market. Individuals with ideas too used the period of economic slowdown to think of doing something on their own.

Plenty of activity

According to Ms Ruparel, there is plenty of activity in the e-commerce, m-commerce, embedded software and mobile value-added services spheres. Moreover, entrepreneurs are looking at developing products and services with more technological sophistication than before. “They are focussing more now on niche areas,” she adds. In 2006, when angel investment started in the country, says Mr Sasha Mirchandani of the Mumbai Angels, there were only two angel groups — the Mumbai Angels and IAN. Now, more and more angel investors are organising themselves into groups, while there are a lot more individual angels now. The Mumbai Angels has more than 120 members and an equal number are waiting to join.

Mr Raghu Rajagopal of The Chennai Angels, which has about 15 investors, too, confirms this trend. There are at least 20 investors waiting to join the Chennai Angels, he says. Similar networks are being formed in places like Bangalore and Hyderabad, also with a lot of entrepreneurial activity.

According to Mr Mirchandani, who is all set to start his own investment company — Kae Capital — with a corpus of about $ 25 million, the need for angel investors has been there for some time.

The Mumbai Angels and IAN and the successes of some of their investments have shown the way for others to follow. “People were selling their businesses and were willing to put their money in start-ups rather than invest in equity alone,” says Mr Mirchandani. It is now a matter of time before the pace picks up.

As Mr Anil Joshi of the Mumbai Angels puts it, the ecosystem for entrepreneurs and angel investors has changed, for the better. “Angels have seen some good exits.” This has convinced others that angel investing is a working business model. Entrepreneurs too have realised the benefits of having reputed angel investors on board, says Mr Joshi.

Risks associated

On the risks associated with angel investing, Mr Rajagopal of the Chennai Angels points out that in early stage ventures, the idea is still evolving and the revenue model yet to be proven. What the entrepreneur thinks that the market will buy may not be what the market wants. If the entrepreneur fundamentals are correct — like a passionate entrepreneur, good track record, building a product, a workable prototype and getting it validated from potential clients — then angel investors will consider investing, he adds. “The entrepreneur needs to do his or her homework before approaching an angel investor,” says Mr Rajagopal.

“Things are falling in place,” says Mr Parag Dhol, Director, Inventus (India) Advisory Co, an early-stage investment firm, of the changing landscape for angel investments. The demand for angel funds is much larger than supply, he says. People who have sold their businesses and made money are now investing in start-ups. A lot of things are happening at the same time, driving this change. The economy is growing and there have been a few successful exits — when angel investors or PE/VC firms have sold their investments at reasonably good multiples — a spate of successful initial public offers. “One thing feeds on the other,” says Mr Dhol. Added to this is the realisation among entrepreneurs too of deploying capital more efficiently.

Demand for funds

Angel investors and angel investor groups feel that the demand for funds in 2011 and the next year too will mirror the record investments seen in 2008. They base their optimism on the fact that there is now greater acceptance of early-stage funding among entrepreneurs and the availability of a larger pool of money for seed funding projects. This will drive investment in this space in the next five years.

“Today the angel investor is looking at any deal that has a market potential. It does not have to be technology driven alone. There can be room for other players too in the market provided if you prove that even a minor market share of, says, 1-5 per cent will be huge revenues in the next three to five years. That will excite the angel investors,” says Mr Rajagopal of Chennai Angels.

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