Angel Funding Framework – some additional viewpoints

There is general consensus that entrepreneurship is on the rise in India, even though it is one of the most difficult propositions. Compared to their counterparts in other regions in the world, Indian entrepreneurs face more challenges that are ingrained in the social and economic conditions that are unique to India. One of the big challenges is the lack of availability of early stage funding from angel investor groups.

Several reasons have been given for why it is the way it is – lack of capital, lack of quality ventures etc. But in my opinion, the absence of a sound angel investment framework/structure relevant for Indian conditions might be the underlying problem. I say that for two reasons. One, there has been a shift in investor mindset across venture stages. VCs have moved up and very few play in seed stage funding and angel investor groups of yesterday are the new seed investors. Hence, angel investing frameworks of the past might not be relevant for the increased size and scope of investments required for today. Two, the range of angel investments being made today is very broad, between 10 lacs to 2 crores. The investment economics and risks are totally different at the two ends and I am not sure if the existing framework is scalable across the entire range. Traditional terms like investment multiple in equity ownership etc, that work in the west, will have to be adapted.

I had a few thoughts that I wanted to share with the group here and get feedback. First of all, the range of early stage investment (10 lacs to 2 crores) is too broad and needs to be broken down. A clear distinction between very early stage bootstrapping and angel group funding is required. Capital requirements under, say ‘x’ lacs should be done through boot strapping with friends and family and funding requirements above ‘x’ from angel groups (I personally think ‘x’ should be 40-50 lacs, but I am curious to hear other opinions). I think this is necessary because, only then the effort and cost associated with raising capital through angel groups would be justified along with return expectations for the angels themselves. Angels would also draw comfort from the fact that the entrepreneur has persevered to get the company off to a decent start before seeking funding and this reduces investment risk.

Second, the funding framework needs to change to address typical concerns that potential angel investors have. In my opinion, Alok’s framework which includes convertible debt instruments is a great starting point and could be a win-win. Ventures that need and are looking to raise a reasonable amount of seed capital (> 50 lacs) will be amenable to the debt terms in the framework, while the angel group ponies up a larger investment, but gets better terms on the deal at a lower risk. I think this could be a model that could attract more high net worth individuals to become angel investors and potentially increase investment size as well. Entrepreneurs will benefit from availability of increased capital and bigger funding size.

I understand that the above model still does not address the capital needs of entrepreneurs who need 10 lacs or so to get their company of the ground. But I am hoping that over time as the angel investing becomes attractive and the angel community grows, it would encourage a new breed of angels to take a higher risk in investing in “idea stage” companies with lesser capital. Comments and critiques are welcome.

7 Responses to “Angel Funding Framework – some additional viewpoints”

  1. Andy Narayanan says:

    Iqbal,

    Lot of good questions. In my view, the key to increasing angel and early stage investments is to establish a structure or an organized system that is relevant to the Indian environment (which we all know has many complexities) and which will translate into returns for investors. Once the core structure is established and proven (with a few exits), it will bring in more diverse investors with an expanded scope.

    The current struggle is to define and agree on what this structure or system looks like. Unless we get past this core issue, it is likely that early stage and angel investment scene will continue to be chaotic and operate in fits and starts since we are solving only for the fringes.

    On your point about mentoring, I would say that most successful web services companies have benefited greatly from mentoring. From University professors, to entrepreneurs, to angels and business leaders have helped guide many a startup from “hopes and dreams” to reality. Till date, I have not seen any successful CEO who is also a “know it all”. If someone claims to be one, I would stay far away from investing in that company.

  2. Alok Mittal says:

    Iqbal – some thoughts.

    Angel investors in US have equally faced difficulties in exits – in fact, over time, the issues due to down rounds and recaps can kill angel investors. India hasnt seen some of those issues yet.

    Risk appetite of investors – I tend to think about how the diversity of investors can be increased. Those investors should then be able to assess risk differentially and lead to a more efficient market. Ex-entrepreneurs may have a higher risk appetite, but then may be not… They can sometimes be more pessimistic than people who havent seen the travails of doing a startup :) So if more investors (decision makers) is good, then seedcamp ideas are welcome, but not the best outcome.

    Mentoring – why do you say the biggest web companies have been built without mentorship? Mentorship comes in variety of shapes – not just with an angel investor. IMHO, smart entrepreneurs are constantly looking out for sources of advice and perspectives…

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