Alok is a first generation entrepreneur, currently CEO and Co-founder of
Indifi, a platform for small business lending.
Alok is a board member at
TiE Delhi, and a founding member of
Indian Angel Network.
Prior to Indifi, Alok ran India venture operations for
Canaan Partners in India, with focus on internet, technology and BPO space. Earlier, Alok cofounded JobsAhead.com, a leading job portal which was acquired by
Monster.com. Alok is a computer science graduate from IIT Delhi and, postgraduate from UC, Berkeley.
The views expressed on this site are personal views of Alok, and do not constitute an offical opinion of any company or organization.
Roshan,
You make some good points.
The category 1 types you mention are the moneylenders of the angel world – who will try to value tech companies at “book value” and such, but then their exits are of little concern to me. I’m starting to see a lot of interest from such people but the mindset of “how much premium are we paying per share” will not go away!
Cat 2 – the 10 to 50 L excess cash sitting in the bank types – these are going to be the real angels in the near term, IMHO. We don’t have a huge entrepreneur success story list in the tech landscape and VC minimums are too high for tech startups in India.(Note that I say “excess cash” meaning this is stuff that’s much beyond their required savings. Networth of such individuals would typically be a 1 crore plus) Such individuals will perhaps be the best bet for a startup today, but will they lock in money for years?
You mentioned bridge loans (the convertible debt at discount to future valuations part), I think they are starting to see the light now – I know founders and founder families that have invested this way. In fact, I’d say founders that invest hard cash should probably go down this route – part of their stake in the company as a bridge loan, the other part as sweat equity vested over a few years.
Giving founders debt to buy equity serves little purpose, though I would imagine that founders would have no problem with it – in my last company, even without angels and VCs, I had taken on debt to buy out someone else. Unsecured debt is usually not a problem 🙂 But then it makes little sense because as a VC you might be able to increase shareholding if you buy out an angel directly, since the company will need only so much cash. Take a hypothetical case of a company needing $2 million and is currently valued at 8 million, which gives the VC 20% post money. An angel buyout would perhaps give the VC 26% or more which they would be looking for as a minimum, but without tampering with the valuation metrics.
In all, I think if deal flow is to come to India, we are going to have to see partial cash outs by earlier investors. Paul Graham even talks about founders getting partly paid for their stock in subsequent rounds – that is our future as well in India. Why do I think this is necessary?
We complain that our archaic Indian labour laws stymie growth, because they don’t allow you to fire someone. If you can’t fire, you won’t hire, we scream. Well, if we won’t let someone cash out when they’ve reached their goal, we won’t find them rushing to put the cash in either.
(If you’re into bonds: Imagine the govt. make a 20 year bond non tradeable, and imagine the response to that issue)
Maybe the big VCs won’t take to it, but there will be investors that’ll be happy to go down this route. I’ve seen a few UK and US investors who are very comfortable with partial cashouts; how long will it take to reach here? Perhaps I should hurry up and get rich, so I can do this myself.
Hi Deepak,
I think the angels you’re referring to are probably those that fall into one of the two categories:-
1. Purely financial a.k.a the family rich
2. People whose net worth does not afford them the luxury to ‘angel’ – (20k – 100k usd in the bank wanting to angel?? ;-))
They typically make the usual mistakes – getting in at too low a valuation, adding no value, bickering, neglecting paperwork etc. etc. Category 2 usually in a few years realizes that they’re not in the ‘zone’ and go into other asset classes. For Category 1, it really does not matter.
The really good angels are very focussed on getting their portfolio companies funded and typically their angel rounds are done as debt convertible into equity at a discount to the subsequent round valuation. This also eliminates any negotiation between the angel and the founder and motivates them both to do ‘fair deals’.
For companies (trying to raise money) or VCs (wanting to invest in a company) who is stuck with angels of categories 1 &2 I would never suggest providing an exit to the angels. I would rather make the founder take on debt (which could come from the VC or a new ‘real’ angel) and let him/her negotiate to buy out these guys before the VC round. If the founder’s unwilling to do so, I would want to think along Alok’s lines.
Of course, I’m talking about ‘real’ VC’s investing in ‘real’ companies that can exit at 100mn+ numbers.
Alok, true – there is reason to think about why one wants to exit. As a stock market investor, I have made decisions to sell companies at (say) 400% profits, when the company went on towards 1000% of what I bought – yet, I wasn’t sulking in a corner. Because a) 400% is pretty nice and b) I’d reached that comfort level of profits.
Angels may not want to stay the distance, which could be much longer than their cash needs, and if the current valuation is attractive enough for them to exit. As individuals I would imagine that angel investors are the kinds that put in Rs. 10 lakhs to Rs. 50 lakhs in a business – and honestly, there are a number of such people who have this kind of cash lying idle in bank accounts (idle = they don’t need it right now). Such people can be angels, but they won’t be because VCs won’t let them book profits until the final exit, years away. Which again they have no control over because further rounds have diluted their stake too much.
The US has a huge background of such deal flow, but it’s absent in India. I was hoping a VC would take the lead and say that they would fund angel exits here (even partially so) and more angels would come out of the woodwork. We need those angels, if only to make more companies VC worthy…
Deepak, I think the question we ask is why the angel investor wants to exit? As an insider, we do assume they have better knowledge of the company than we do, and with that knowledge, if they dont believe its worth their while to stay on, it sometimes may send the wrong message. but then this business is full of exceptions!
Good interview, Alok.
I liked your point about the larger capital developing deal flow. A few potential angel investors I know are concerned about the longer time for exits, typically six to eight years now, but most VCs are loathe to let an angel cash out in a round. I probably shouldn’t ask, but does Canaan have a different perspective? Will you buy out an angel if the opportunity is worth the investment?
My best wishes to you and Canaan, and I hope you’ll all be rich and successful and build the ecosystem.