Where Angels love to tread

Start-ups love them. They boldly venture into areas where private equity and venture capital funds fear to tread. They provide primary source of funding to entrepreneurs with brilliant ideas, but empty pockets.

They are Angel Investors — the driving force behind the new-found energy in Indian entrepreneurs. These investors act as guardian angels to entrepreneurs; mentoring them and also tapping their rolodex to help out with connections.

But what draws these investors to bet their time and money on untested ideas? Here is what some angel investors have to say.

It is the new ideas themselves that are the biggest draw, says Anand Ladsariya, who has invested in nearly 50 start-ups till date. “Every new idea I hear gives me a kick. It is very addictive,” he says.

Ladsariya is a first-generation entrepreneur who owns Everest Flavours. His wide experience from betting on start-ups since 2008 has taught him that seemingly good ideas may not pan out as expected. “We were very bullish on coaching classes as good business in the education sector five years ago. It turned out to be not a great idea,” he confesses.

Ladsariya’s son Siddharth , who is in his thirties, is also an angel investor. But they do not think angel investing is the right thing for many.

“It is a very difficult process. You have to be passionate about working with young entrepreneurs in their new ventures and also spend a disproportionately large amount of time compared with other investments,” says the younger Ladsariya. He thinks you ought to do it for reasons “other than monetary gains.”

So, how to choose the right idea? “Angel investing is really a bet on the entrepreneur,” says Ladsariya. “Ideas keep changing, but if the founder and the team are good, everything falls into place.” There are, however, no quantitative metrics to evaluate the quality of the founder.

He prefers someone with domain expertise, as it reduces the learning curve. “I also check if their thought process aligns with mine.” This helps minimise chances of friction when working closely as a mentor.

Big investments in companies that ‘vanished’ have taught him to be prudent about how much money to commit. “I used to take big bets in the past. Now, in the first round, I limit my investment at ₹10-20 lakh.”

He is also part of angel networks such as the Indian Angels Network. The members in the group together pool in around ₹2-3 crore. “This gives us 10-20 per cent stake in the company.” He watches how well the company is performing and doubles his investment “if there is traction.”

“If you invest in 10 start-ups, only two or there will be multi-baggers with 30-100 times returns. A few will chug along just ok and three-four of them will close down”. But it is never easy to pull the plug on failing investments .

“It is a very difficult emotional decision. We have spent so much time and are also emotionally invested in their success.” Besides a heart of steel, you need a steady head not to get carried away by the market exuberance.

“When everyone gets excited and bullish, the expectations become high. This is the time when bad decisions happen,” he cautions.

S Rajamohan, Managing Director of Envirocare India, an environmental engineering solutions provider, is a new entrant in the world of angel investing in his town of Madurai, Tamil Nadu.

“I want to work with the next generation entrepreneurs and provide time, talent and treasure,” he says as the reason why he wanted to explore angel investing. He is himself a successful first-generation entrepreneur — his business, which started with a capital of ₹2,000 in 2004, now offers service and products to over 1,000 clients and boasts a turnover of ₹20 crore. So, he empathises with their struggles for funding and, importantly, lack of mentors.

“Founders are discouraged by everyone they approach and they get no private funds. Their only choice is to go to the banks or government agencies for loans. Most of the operations in Madurai are in the services sector such as IT or healthcare, which only requires a capital of ₹5-10 lakh. Still, it is not easy to get this money to start,” he says. To support budding start-ups, he plans to invest ₹2-3 lakh and share his knowledge. “I have a limited amount of time. So I will only take up one or two start-ups.” He says that mentoring on business strategy would make a lot of difference to the success of the organisations, more than the funds.

And instead of going it alone, he is working with the newly launched Native Angels Network, part of a non-profit foundation that is looking to invest in over 20 ventures in the next 12 months.

And it is not monetary gains that he hopes to reap, certainly not in the first three-five years. “You also learn a lot by working with young founders. There is a great sense of satisfaction in taking part in the journey,” he says.

The journey of small-town entrepreneurs is in reality an odyssey, fraught with risks. “The enthusiasm of the entrepreneur fades when the business starts facing troubles,” says P Mayilvel, Managing Director of TechSun Energies in Tuticorin. “It is mainly due to their higher expectation of profits and lack of experience.” Add to this the lack of infrastructure and manpower in small towns and success becomes very difficult. But Mayilvel, based on his experience of creating a successful clean-energy company, is optimistic about success as an angel investor. He has been an active investor since 2008 and has invested nearly ₹6 crore in multiple start-ups.

“As a first-generation entrepreneur, I benefited a lot from the help and guidance received in the early days of my business. Keeping that in my mind, I began helping deserving start-ups in the community,” he says.

“I want to focus on companies in green energy and engineering segments and also software. I look at the business model and the track record of the entrepreneur before funding. You need to ensure that the investment is really used for the business. So we look at the return on investment.”

Acting as an angel investor is no cakewalk. “In the past, these businessmen had given money to early-stage companies. It was quite ad hoc and there were no returns,” says R Subramaniam Iyer, who promotes angel investing.

He is an angel investor himself with a focus on social enterprises that work on water and sanitation issues. With no follow-up, it was only natural that in spite of their zest to expand beyond their traditional business, the local HNIs were sceptical. “They want to ask the right questions before investing and want to be involved all along, not just in writing the cheque,” he says.

Iyer, who is associated with TiE, an organisation that promotes entrepreneurship, is putting together a training programme for the angel community. As more angels actively show the way, we may see many more next generation businesses having a fairy tale beginning.

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