Sumanth posted this comment on my earlier post regarding 2013 predictions for startup ecosystem in India. The topic interested me enough to write a full post on the subject of where angel investors seem to stand in the ecosystem. I write this post as one member of angel investment community in India.

First, an anecdote – I got a call from a very dear and active angel investor friend couple of weeks back. He is one of the better performing angel investors in the country. The concern in his voice was evident. His question was direct – “I have heard that VCs have stopped backing ecommerce companies in India. What is your view?” I tried explaining to him that Canaan is still keen to look at exceptional ecommerce companies, but this question captured the state and issues with angel investments in India.

1. In relation to the kind of companies angel investors are backing, i.e. companies which will need more capital in the future, not to thrive but just to survive, we remain critically dependent on the health of venture capital. Ecommerce is an extreme case in point, where large amounts of follow-on capital are required. However, even in lesser capital intensive models, requirement of follow-on capital is critical. Hence it becomes very important for angel investors to anticipate the health of venture capital industry 12 months down the line.

2. The venture capital industry in India is relatively small. And besides sporadic instances of “spray and pray”, it has mostly remained tight and focused its resources on one or two bets in a given area. That means that not more than 3-4 companies in any given space get to Series A. Angel investors need to understand this dynamic, and hence not just look at whether a company could build a good business, but also whether it has credible chances of raising the next round of capital to get there. A small VC industry also poses the issue of volatility – couple of VCs talking about an area being over-invested in enough to create a sudden negative sentiment.

3. The angel investment community in India lacks diversity of viewpoints (as does the VC industry, but that is harder to fix and will take more time.) In another discussion with a fellow Indian angel network member (a group that I co-founded and am proud to be part of) my biggest concern with our model has been that in spite of being a 200-angel-strong group, we appear like one to the entrepreneur – we are a monolith as far as assessment of opportunities is concerned. That leaves very few doors and very few perspectives for the entrepreneur to tap into. There are probably 10 other significant angel funds/groups (not counting accelerators and incubators, which tend to supply far lesser capital.) So while collectively, India may have a thousand angels at work, we represent 10-20 decision points. That is too low to trigger innovation.

No doubt, the situation is improving. However, I think of the current period as somewhat of a moment of truth for angel investment community. Is the Indian angel investor ready to lead? Are we ready to step up to the plate and make bets that we know VCs don’t like/understand today? Are we simply going to follow what we expect VCs to do 12 month down the line, or are we going to show them the way? Is our vision going to be just about the next round of financing, or creating truly great companies?

I do not imply that none of the angel investors are doing what it takes – many are, more need to. However, just like entrepreneurs don’t build businesses for angel investors, we can’t back businesses for VCs.

Angels, show me the way.