September 18, 2009

Wanted Fools and Angels! - Article by Sanjay Anandaram

Alexander Pope’s 1709 “Essay on Criticism” had these immortal lines “…for fools rush in where angels fear to tread”. He was of course referring to the literary critics of his time and, in his time, implied some one who behaved foolishly rather than referring to a simpleton or someone lacking in intelligence as it does now.

Every entrepreneur, observer, VC, analyst and even bureaucrat will tell you that there’s a severe shortage of true boot-strapping capital. The money required to really start off on the entrepreneurial journey. Friends, family and fools (collectively FFF, rather unfairly but with tongue firmly in cheek) provide the initial emotional and perhaps some monetary support for the budding entrepreneur. It invariably takes more than that to demonstrate the venture is capable of taking off.

Ours is a capital starved country. There’s a huge shortage of investment funds in the country. The shortage is on account of regulation and partly in fact as well. Almost all the money invested by VC funds today is sourced from investors outside the country. This directly and indirectly impacts the size of the fund, profile of fund managers, risk appetites, kinds of deals, time-frame for investments and exits, return expectations and the like.

The venture capitalists would rather fund revenue generating companies with at least $1m to $2m for it to be worth their while and that’s just for the very few. A majority want a company that preferably has a full team, revenues, a working business model, generating cash and is close to profitability, if not already profitable. Of late, a few focused seed stage VC funds have emerged that aim to be the bridge between the FFF and the other VCs. But these are the oddballs. While more seed stage funds will undoubtedly emerge, the truth is that securing early stage funding of between Rs 50L and Rs 2 crore is a serious challenge. Which is what most entrepreneurs are looking for.

That’s where angels tread in. Angels are usually experienced entrepreneurs and successful senior executives who invest their own money (unlike VCs who invest out of an investment pool) in very young companies for reasons other than pure monetary returns. They are excited by the company building process and by the opportunity to learn, wish to mentor, believe in the opportunity, and love the team. They provide valuable business advice, referral networks and, of course with the right angels, credibility. As nature abhors a vacuum, angels have emerged in the last few years. Not surprisingly, this coincided with the success of a few entrepreneurs and companies in the last decade or so. They’ve also formed angel groups like the Indian Angel Network and Mumbai Angels. Organizations like TiE too provide a forum for entrepreneurs and angels to connect with each other. But as with the entire Indian entrepreneurial ecosystem, these are early days and the impact of angels and angel networks is yet to be realized.

According to the UNH Centre for Venture Research and PwC MoneyTree surveys, in the US in 2007 alone, angel capital of $27 billion was invested in 57,000 companies! Contrast this with about $30.6 billion of VC capital invested in 3918 companies in the same year. But even in the US, angel capital while being more readily available is still hard to raise. The Indian Angel Network has 80 odd members, has invested about $3m or so in 18 companies.

Data from Angelsoft suggested that in 2008, there were over 300 angel groups accounting for over 12,000 individuals. These groups syndicate deals amongst themselves and entrepreneurial companies get access to more than one group for raising additional capital.

Clearly, there’s enormous room for more angels to participate and the good news is that with the growth and successful expansion of the Indian economy and companies, more and more educated, experienced and aware potential angels are being created. Forums for these angels need to be created (as they invariably will be) where they can learn, understand, network and partner among each other. The government can pass legislation that makes it attractive for companies and individuals to invest in young companies targeting risky high growth opportunities, that are creating interesting intellectual capital or creating jobs.

It is only with the active participation of a very large number of angels who are passionate about creating successful companies in India will this issue of early stage financing be meaningfully dealt with.

What do you think?