‘This is the Platinum Age for entrepreneurs’

As President of the Indian Angel Network, the largest group of angel investors in the country, Padmaja Ruparel is understandably excited.

She has a comprehensive view of the entrepreneur ecosystem in the country and says there is nothing like now to being an entrepreneur. Padmaja refers to the Golden Age of India, during the Gupta Empire, and says, “we are in the Platinum Age. At least in the start-up ecosystem. I have never seen this kind of activity.”

The entrepreneur ecosystem continues to evolve, with start-ups moving beyond metros to smaller cities and towns. Angel investing – wealthy individuals who invest in and mentor start-ups – has changed from being a hobby a decade or so earlier to a serious business. Angel investors spend more time nurturing the companies they invest in and angel networks have sprung up across the country.

Changing perspective To top it all, in the last three years, says Padmaja, the government’s focus on start-ups has really changed. “The train has started to leave the station. There is a push, there is an encouragement, there is this whole culture of start-up which has helped in different ways,” she adds. Along with this, is the change that has come about even among the older generation. Till recently, the younger generation was willing to accept failures. Today, even the parents are ready to accept failure. Which means the idea of starting up on your own has seeped into the older generation.

According to her, another significant change that has come about is the trend of large companies looking at start-ups. That is a big opening because the corporates bring a lot of value, they have deep technical expertise, domain understanding and they are excellent pilot platforms. They have product suites where they have invested so much of time, but there are gaps in that. This is where start-ups with the ability to innovate, doing products better and cheaper can come in and play a role.

Start-ups come in with a different perspective, bring out-of-the-box thinking, they are much more capital efficient. Start-ups have access to good talent and corporates are now starting to leverage all of these advantages that start-ups offer.

There is a lot more venture capital and private equity money available for start-ups in the country now than a few years ago. However, what needs to change is that a lot more money has to be invested in the early stages – seed and angel – if the ventures are to survive and the ecosystem is to flourish.

Also, says Padmaja, companies should be able to raise capital when they need it at whatever price somebody is willing to pay, rather than raise funds at a valuation higher than or at the same level as the previous round.

“There was a lot of foam in the system. That is why you were getting inordinate or very unusual valuation numbers. That has sort of settled down. They are a bit more realistic now,” she says. She dispels the notion that angel investing is confined only to the tech sector and points out that it is spread across sectors and geographies. For instance, IAN itself has invested in companies such as Mukunda Foods, a table-top dosa machine maker; Box8, a quick service restaurant chain; Wow! Momo, a chain of fast food restaurants; and, Transcell Biologics, a stem cell research company. What has also changed with angel investing is the realisation that it makes sense to diversify your portfolio to spread the risk and that it is better to invest in a group so that the strengths of each member of the group can be leveraged. It is not enough to just invest and add value, it is important to know when to exit. “Making money is not just a factor of investing. Making money is a factor of investing and exiting. We can keep screaming our lungs out to say exits are not happening, but are you leveraging the exit opportunities?” says Padmaja.

She explains the rationale behind IAN starting its own fund. IAN realised that there was a gap in the value chain, in that companies that had raised about half a million dollars and done what they could, were finding it difficult to raise a higher round, say $1-5 million.

Investment criteria In about a decade of its existence, IAN has invested in 104 companies across 17 sectors. It classified these investments into excellent, good, above average, average and those that had to be written-off. How did it arrive at these classifications? In the case of companies that had raised funding subsequently, IAN went with the valuation that was offered by the investor. In case there was no external funding, it took the valuation at the same price it invested in and those that were write-offs, the valuation was taken as zero. Based on these parameters, says Padmaja, IAN found 23 per cent of its portfolio companies were at the top level. In the case of companies at the next level, the reason for them being “good” and not “excellent” was that their subsequent round of funding got delayed, because of which they could not hire fresh talent, taking the product to the market was delayed.

IAN went one step further and tried to find out what the IRR would be if there had been an external investor in all the 104 companies, on the same basis as the parameters of evaluation. “Our IRR is 32 per cent, with a 15 per cent write-off,” says Padmaja. This was a good rate of return, but the challenge was how to improve it. “The companies’ real need is the next round of funding,” she adds.

That is the reason behind IAN launching its own fund, the corpus for which is ₹350 crore with a ₹100-crore greenshoe option. IAN has done two closes and raised about ₹280 crore so far. The investors include YES Bank, IIFL, SIDBI, individual investors, family offices institutional investors and some overseas investors. Nearly 60 per cent of the fund so far is from domestic investors, which, she says, shows there is appetite in the domestic market for such type of funds.

According to her, IAN will invest out of the fund in three buckets. One, if there is a company that is raising money from angel investors up to, say, $1 million. The fund will invest 20 per cent in that round, with the angel investors bringing 80 per cent of the money. It is playing to that 32 per cent IRR bracket, she adds. The second category will be companies in the IAN portfolio that are looking to raise $1-4 million (₹6.5-25 crore) and IAN will invest up to 50 per cent of the round, being a co-investor along with venture capital firms that come in at this stage. The third bucket, which Padmaja describes as “best of the rest,” are non-IAN companies. Just like IAN portfolio companies that find it difficult to raise external funds, there are other fims that face a similar problem. The IAN fund will invest in them either on its own or co-invest. It will open 20 per cent of the funding to IAN members.

“That is why this (fund) is such a unique proposition,” she adds. The IAN fund will invest 25 per cent each in bucket one and three, and 50 per cent in bucket two, according to her.

She says one of the biggest changes in the entrepreneur ecosystem is that companies are now building products and services for the domestic market, testing them out here itself and launching them in India. Earlier, they were building products and services for the overseas market, mainly the US, from India.

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