Sarah has a good roundup of lack of angel investing activity in India. Lets get to the more interesting part – how to solve it?
I ran into Vishal Gondal on a flight few weeks back and he had a model that is pretty interesting. And may be there are some other thoughts in the community. So let me try and frame the problem.
How do we get 1000 angel funded startups every year with average initial investment of $100K? That’s collective $100M in angel capital – enough to get started. Some key issues/ constraints/ leeway:
- Any sector
- The amount may be available through formalized groups or otherwise
- Mostly to concept stage businesses, sometimes prototype – definitely no revenue threshold
- No express requirement for mentor, or active investors (yes, this was a tough one for me to let go)
- Doesn’t include advisory capital, sweat capital, incubation resources, etc – talking cash here
- Equity investment with profit motive – no debt, no collateral, no grants
The unstated one of course is sustainability and good choice of ventures – which is a decision that markets can make. Again, I have no included ownership thresholds – markets can decide that.
Smart ideas out there?
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Why can’t we have VC funds putting some 10-50 lakhs as convertible debt to promising teams working on promising ideas. The money may be released in trenches based on achievement of relevant milestones.
Evaluate the team, do a ref check and make sure the team is worthy of investment and if you select the right team it would not need a dedicated manager to manage this investment.
Series A, the VC firm may have the first right to invest in the company, if the company is ready to move to the next level and needs investment for the same.
Krish – for the market to support many sectors, individual angel investors dont have to be sector agnostic – they can participate in sectors they have experience in. Similarly, I am not suggesting that active investors dont have advantages – for purpose of defining the problem, that is a constraint that can be relaxed.
Debt – interesting to hear your views on that. My observation is that many (perhaps most) entrepreneurs lack the ability to secure a debt in form of collateral and personal guarantees. Convertibles are essentially equity vehicles in my mind (if the company goes bust, it never gets repaid), and very well accepted as vehicles for angel investing.
Lack of angel activity is a mixture of our social and cultural make up, and our risk appetite. Though 1000 angel-fundings per year at an average of $100K is a great goal, how can it happen unless our attitude, outlook towards risk and trust/respect towards small entrepreneurs changes?
We may have to wait for a generation change to see that in reality i.e. a generation of successful people who in turn become such angels and have the genuine heart to give away such a risk capital.
Until that happens, can we think of any other means? For example, instead of finding angels, some other means where by we do not have to look for angels but still can seek and get investments of $100K. Maybe that is the fund levels at which VC systems need to work here in India. I understand that it may be too little amount, but that is where imagination is required. US-centric solutions may not fit us.
Scalability is required- it cannot be provided by any single individual or an adhoc association of individuals. Systemic institutions are needed at $100K levels. For that if existing VCs need to rethink their models, I think it is worth it. Become MVCs (Mini VCs) or any other name, don’t call it Series A or angel round, come up with new simplistic model. Better if it is equity sharing and not with hidden terms of loans/mixture/etc. Systemic professional intervention is required.
(And no, let us not get institutes into all this. They cannot do it- whatever contests and centers they create for “entrepreneurship”).
Alok,
I was looking at some of the constraints (or relaxations?) you had outlined –
#1.Any sector – sector agnosticism expects angel to forego the basic tenet of this asset class, one of investing in a domain where the angel has proven expertise (that’s where the rubber hits the road).
No debt, collateral or grants – pureplay equity is often a non-starter because of valuation expectations in the early stage.
Startup founders’ conviction/commitment can be gauged from their readiness to borrow and invest. That means making allowance for *debt* as bootstrap. It would offset valuation mismatches and lender comfort can be extended by way of a convertibility option (into equity) at a later stage at a pre-agreed number subject to achievement of significant milestones.
Pureplay equity at a seed stage to a non-proven team, with no mentor requirement, no active investor participation is a bit like throwing darts.
I am a first time entrepreneur and not a number wizard yet, unlike others here. So I will answer this in a mix of numbers and philosophy (a bit from the Guy Kawasaki flair too) and with a bit biased from web startups point-of-view.
today – a drought -> $0 (not literally but summarily)
>>>HUGE GAP<< $100k*1000 -> $100M
That HUGE GAP can only be covered in smaller steps.
I think a few golden rules, which all of us already know, apply here and should be adhered to, if a radical change, for good, in the situation of angel funding in India is to be brought about.
1. Think big start small:
Not $100k, start at $20K -to- $50K. YC does $20K in US, this is India, less costs, etc, etc.
2. Take one step at a time:
Don’t even think of 1000 startups, think 50-to-100 really good teams with workable ideas.
I mean why it has to be a like a corporate/institutional yearly target = 1000, just start!
3. Sow a ‘few’ seeds first:
The mindset does not and will not change for all VC’s out there at one shot. After all its their money and many (a fairly large percentage) are “follow only, never lead” investors. So the daring Angels who understand the need, are aware of the fact that the time is ripe to do angel funding in India, even for web products/Saas and who are upto the risks involved should come out and lead others by examples.
This is the most important part “changing the mindset” and a few people will have to work on it with persistence and perseverance until we see a change.
4. Liberty: Angels should put their money and trust in the teams that look promising to them and then give them room to breathe.
Angles
should be transparent,
should avoid late/latent disclosure of frills, too-much parenting, micro-management, hand-holding, eager/pushing to sell out early, etc.
They may keep a un-intrusive watch all the time and should be willing to be very active on-demand, though this one is subjective and is a part of the mutual contract between the investor and the startup.
5. Smart teams with innovative ideas:
All the above with no compromise on innovation, only the smart teams with innovative ideas should be funded, without a doubt.
Find such startups by organizing ” ‘no-frills’ ‘fast-pitch’ ” event (a mix/variant of proto and headstart) :
*close-room,
*limited people – interested angels only with atleast an oath of non-disclosure,
*cheap event not treating like a delegate with a big-fee ticket at some Taj,
*bring in CTOs and CEOs, with non-dislosure oath, from successful non-compete startups as insight providers and critics.
*…
P.S.
Shameless plug:
I have been brewing a concept, for the past few months, which can contribute to this in someway. The concept being:
>>> mix = co-working entrepreneurs + YC variant
**co-working = “Coworking is cafe-like community/collaboration space for developers, writers and independents.”
This will help setup a ecosystem of startups and also encourage them to work together and explore new horizons.
[ http://coworking.pbworks.com, http://betahouse.org/%5D
**YC, I need not say, as you all know it, but for illustrative purposes of the variant here, it is = a small fund, big backing, little mentoring, very little intervention, lots of awesome candid advice on demand, rockstar networking, helps in raising the next round.
If anyone feels interested and want to know more, please do get back to me. [the name above this comment is a hyperlink to my blog]
Hope I made some sense.