Angel investors and their stripes

In the piece I had written in these columns on December 13, 2016, I had highlighted the terrific growth in angel investing in recent years. In 2015 alone, there were close to 1,000 angel investors who had invested in start-ups.

While the cup of investors cannot be seen as overflowing, the increased interest from individuals to invest in start-ups is definitely a development to rejoice. However, an entrepreneur needs to realise that selecting an investor partner is a momentous decision that can make or mar a venture. In this article, I highlight some of the characteristics of the angel investor segment that can be of help to an entrepreneur.

Well, how much can a start-up raise from an angel funding round? Today, entrepreneurs can aspire to raise much larger amounts from angel investors than what they could 5-6 years ago. Start-ups on an average raised about ₹4.5 crore from an angel investment round in 2015-16, a more than four times increase from 2009, implying an annual growth rate of 28 per cent. However, it needs to be remembered that more often than not, groups of angels syndicate to make an investment. Thus, if the angel round amount increases, the entrepreneur would have to contend with the practical issue of managing multiple investors. How much does an individual angel investor invest? Our results show that the average investment made by individual angel investors in recent years has been between ₹1 crore and ₹1.5 crore. This has grown by eight times in the last six years, implying an annual growth of 34 per cent.

Since the individual angel investors are investing higher amounts in recent years, the number of angel investors in an angel round has reduced by 44 per cent in the last seven years. This meant that entrepreneurs had to deal with fewer investors giving them more time to run their business.

While some angel investors make frequent venture investments, some do it occasionally. Whom should an entrepreneur approach? To find out, we divided the investors into four quartiles depending upon the number of investments made by them. The trends are quite interesting. The top three sectors for all the four quartile categories are software and internet services, internet marketplace and e-commerce, and consumer products and services. Thus, angel investors as a group tend to favour investments in these categories.

However, occasional investors are characterised by a higher degree of diversity in terms of the number of deals in different sectors, whereas active investors are characterised by a higher degree of concentration. Bulk of the investments made by the active investors are in the top three sectors indicated above, with very little in the remaining sectors. This is because most active investors have prior experience in the technology sector and angels invest in areas they are familiar with. We also analysed the average deal investment amount and the total investment made by different angel investor quartile. The results were remarkable. Occasional investors made significantly higher investments per deal as compared to those made by active investors. The aggregate investment made by the occasional investors as a group is much higher than that of active investors.

Our inference is that more active investors are diversifying their risk by spreading their investment across more companies. What does it mean for the entrepreneur? If their venture is outside of technology, software, e-commerce, and consumer products domain, then they have a higher probability of getting funded if they approach the occasional investors who are familiar with the area. And what more, on an average they can also raise larger sums from such investors.

A tiger cannot change its stripes. Or for that matter, a leopard its spots. Similarly, every investor has distinct investment styles. Since fund raising is a time consuming and intensive process, the entrepreneur needs to be judicious in identifying prospective investors. While the angel investment segment has grown significantly, an understanding of the scale of capital that can be raised from such investors is critical. Even more importantly, entrepreneurs need to realise that there is a world of occasional angel investors out there beyond the poster boys of active angel investing.

The writer is Professor, Department of Management Studies, IIT-Madras and International Research Affiliate, Coller Institute of Venture, Tel Aviv University, Israel.

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