ANGEL INVESTING: A CASE STUDY OF INDIAN ANGEL NETWORK With the advent of Liberalization, Privatization and Globalization (LPG) the Indian economy has witnessed a tremendous transformation. The Indian markets have taken leave of their closed nature and have become open and dynamic allowing free competition from global players. The winds of change are blowing over the global market and economy. With the process of the change, the approach of people is of more into entrepreneurship by showing the creativity and innovative ability to explore for the benefit of the society.
As and when we enter into the 21st century, we found there is an innumerable change in the world of Finance. The concept change has establish from the traditional accounting system to USGAAP to IFRS, limited investment scopes move to wider opportunity, and domestic investment to foreign direct investment and foreign institutional investments. The success of every organization depends upon how the organization is able to raise its required funds at the time of requirement.
In India, many small entrepreneurs are coming with innovative ideas but they lack start up capital to convert their ideas into reality. In this paper an effort is made to bring a new source of finance to accept the timely change of entrepreneurship. SOURCES OF FUNDS USED BY INDIAN PRIVATE SECTOR Sources of funds for private corporate sector manufacturing firms in India, 1995- 96 through 2006-07 (Percentage shares) Item/year |1995-96 |1996-97 | |Angel investors |21 |4 | |Bank loans |22 |4 | |Family &friends |102 |17 | |Personal savings |409 |70 | |Personal credit cards |4 |1 | |Venture capitalists |9 |2 | |Not mentioned |21 |4 | |Total |588 |102 | Sources of initial funding of National Entrepreneurship Network start ups source: National Entrepreneurship Network On line :http://www. nenonline. rg/ Sources of additional funding of National Entrepreneurship Network start ups |Source |Total no |Percentage | |Angel investors |66 |11 | |Bank loans |45 |8 | |Family &friends |113 |19 | |Personal savings |234 |40 | |Personal credit cards |12 |2 | |Venture capitalists |48 |8 | |Not mentioned |70 |12 | |Total |588 |100 | source: National Entrepreneurship Network On line :http://www. nenonline. org/ Angel investing as a source finance An angel investor or angel (known as a business angel or informal investor) is an affluent individual who provides capital for business start-ups, usually in exchange for convertible debt or ownership equity.
Ten years ago; access to individuals who invest in early-stage companies was hard to come by for entrepreneurs seeking such financing. These days, however, the angel investing landscape has changed. As angel investors increasingly pool their funds or connect in networks, they are becoming more accessible. For today’s entrepreneurs, the different landscape provides opportunities that might not have existed in the past. While “angel” investors – exited entrepreneurs and experienced business people who have the TIME and MONEY to put into early-stage companies – have always been a part of the entrepreneurial scene, they are now breaking down into sub-categories. Some, called “lone rangers,” prefer to invest alone or with a small informal group.
Others, namely “angel funds,” pool their resources and invest collectively, in a sort of “one for all, all for one” approach determined by a vote of the majority. Finally, there are the “angel networks,” whose members study companies as a group and consult among themselves about attractive opportunities but make individual investment decisions. Usually, only a fraction of the total network invests in any one company. Growth of Angel Investing Entrepreneurs who have untested business models or innovative ideas typically get their first round of funding from angel investors. If and when their business model works and they are ready for scale up, they approach venture capitalists who usually invest more money (at least Rs 250 million) in the company in return for an equity stake.
Angel investors, broadly differ from venture capitalists in the scale of funding. Besides, angels invest their personal wealth as opposed to venture capitalists who mostly work as fund managers. The size of the angel investments have been variously estimated to about Rs 10 billion in 2007. There is an inexorable link between the growth of angel investment and the growth of High Net worth Individuals (HNIs). This can be further explained as follows. Though the risk with start-ups is much higher than other asset classes such as real estate, equity, mutual funds, commodities and sometimes even art funds, HNIs are betting on the opportunity of considerably higher returns associated with start-ups .
To institutionalize this process of channeling funding from HNIs to technology-oriented start-ups, the Indian Angel Network (IAN) was founded in 2006. Around 80 HNIs are part of this network today, up from about six when they started in 2006. In the recent past, the angel community has grown considerably in India. A typical investment by an HNI in a start-up falls in the range of Rs 1 to 5 million and the exit duration is usually between 4-7 years. The returns, on the other hand, can vary from 400 per cent to even zero if the investment goes bad. Hitherto the network has supported around 12 technology-oriented ventures primarily in the arena of IT software.
In a bid to promote funding for start-ups, the government plans to offer tax breaks to angel investors, who provide a part of their personal wealth as seed capital for such firms. A proposed legislation, the National Innovation Act, envisages doing away with the stamp duty currently levied on shares held by angel investors and the tax imposed on profits they make in early-stage firms. However, these tax breaks would apply only to companies that are incubated in designated areas—called special innovation zones (SIZs) and are likely to include technology parks and incubation facilities of academic institutions such as the Indian Institutes of Technology, or IITs. Growth of Angel Investing in India and World wide Angel investing |Total investors |Total capital | |Worldwide |14833 |INR 2,61,14,38,50,60,216 | |India |1009 |INR 3,03,58,15,51,540 | Source: Angel investment network Indian Angel Network(IAN) Indian Angel Network is India’s first & largest Angel network with successful entrepreneurs and high profile CEOs interested in investing in early stage businesses across India, which have potential to create disproportionate value. The members of the network have had prior entrepreneurial and/or strong operational experience that they bring to early stage businesses.
They share a passion to enable more early stage businesses to create scale and value. Indian Angel Network believes that early stage businesses require more than just money to succeed. They require close mentoring and inputs on strategy as well as execution. The Network aims at enhancing the success rate of early stage businesses significantly through high quality mentoring, vast networks and inputs on strategy as well as execution. The Network members, because of their background, are better able to assess the potential and Identify risks at an early stage. The Network looks at investing from USD 100,000 to about USD 1 mn, and exiting over a 3 to 5 year period through a strategic sale.
The Network may consider investments over a million dollars but is only likely to do so through syndication. The Network has invested in multiple sectors like Information Technology, Intellectual Property, Hospitality, Mobile, Education, Internet, etc. Partnership with other organizations Indian Angel Network seeks to build partnership with organizations geared to play a vital role in building the entrepreneurial ecosystems in India. Along with its partners, The Network aims to provide entrepreneurs across the country with a platform to interact with successful entrepreneurs and established professionals and receive their guidance towards building a quality organization. NAME OF THE ORGANISATION |AREA OF OPERATION |BENEFIT TO IAN | |The Indus Entrepreneurs (TiE) |Entrepreneurship promotion |helps budding entrepreneurs through advice,| | | |guidance and assistance from successful & | | | |experienced entrepreneurs and professionals| |NASSCOM |Global trade body in IT & software | Providing database in the business of | | | |software development, software services, | | | |software products and IT-enabled/BPO | | | |services. |Indian Venture Capital Association |Venture capital and private equity |Regulatory assistance | | |activities | | |UK India , |Promotion of entrepreneurship in India and |Provide entrepreneurs for still another | |Business Council |UK |association to network and leverage for | | | |their companies, and most importantly, seek| | | |coinvestment opportunities between the | | | |angels of the two countries. | |NEN |Supporting activities to new entrepreneurs |Provide assistance in searching | | | |entrepreneurs | |Society for Innovation and |Promotion of technology based |Innovative ideas related to IT | |Entrepreneurship(SINE) |entrepreneurship | | Investment Criteria
The Network is likely to invest in start-ups that meet the following criteria: • High barriers to entry. • A complementary management team • Scalable business • Differentiated value proposition (a unique product/service/process, either in concept or implementation) Process at IAN Every entrepreneur who applies for assistance is given an opportunity to present his business idea to IAN. The process consists of the following levels 1st level: 15 mins. Elevator pitch by entrepreneur – explain the proposition, plan and the passion 2nd level: 45 mins interaction for detailed pitch. 3rd level: Subgroup of investors for term sheet, Share purchase agreement and investment Post investment: value addition continues IAN assessment process
The assessment process of IAN includes some of the basic questions regarding market, product, marketing strategy, skill and expertise of the team or the entrepreneur, projected financial statement and exit routes which are as follows. The Market: The following are the basic questions generally asked by IAN to the entrepreneurs regarding market. • What is the space where you will operate • Is it large and rapidly growing • What is the competition to your product • What is your strategy to deal with competition • Has any market validation happened The Proposition: The following are the basic questions generally asked by IAN to the entrepreneurs regarding business proposition. • Clear definition of product or service Is it already developed or can you validate that it can be developed • Have you clearly defined your customer • Why is your product / service necessary • Is it doing something Different / Differently • Is it “need to have” / “nice to have” Execution: The following are the basic questions generally asked by IAN to the entrepreneurs regarding Execution. • How will you deliver • Experience of pilots, prototypes etc • What is your sales / marketing plan • Scaling up plan • Risks / mitigating plan Team Team is fundamental to early stage venture, providing the best collateral for an investor. IAN is in search of the following information regarding the team. • Track record Coverage of skills – finance, technical, marketing, etc • Stock/compensation plan • Advisers, etc. Financials: IAN is interested to obtain the following financial information. • Current / Projected for next 3 years • When will it break even • Self investment & funding received till date • Investment sought • Valuation expectation Exit: IAN looks for the suitable exit routes before investing. • Building an exit option is necessary for yourself, your team, and your investors • Investors will monetize their investment ¦ How ¦ When ¦ What Present status • 15 investments made to date across multiple sectors |NAME OF THE ORGANISATION |SECTORS |KNOWCROSS |TECHNOLOGY | |SANSHADOW |INTELLECTUAL PROPERTY | |MOBILE NXT |MOBILE | |AUTHOR GEN |SOFTWARE | |ELECTRONIC TENDER |INTERNET | |VIENOVA |ONLINE EDUCATION | |VIEDEA |IT/ITES | |DRUVAA |TECHNOLOGY | |EUREKA |IT INFRASTRUCTURE | |ROBHATAH |ROBOTICS TECHNOLOGY | |TECHLIT SOLUTIONS |KPO | |HUNGRY ZONE |HOSPITALITY | Over 50 deals received per month and several deals on the anvil for investment • Operations in Delhi, Mumbai and Bangalore, processes established Conclusion It is widely acknowledged that the US leads the world in innovation and entrepreneurship because it has the world’s best and most vibrant angel and venture capital eco system. They have a large number of successful, experienced entrepreneurs and businessmen who become “business angels” and invest small sums of money in innovative and start up ventures . More importantly, these angels provide invaluable advice and mentoring, which is almost more important for entrepreneurs to succeed than the money itself.
Additionally, angels also provide entrepreneurs an access to their vast and valuable network of business contacts. It is well acknowledged that the success rate of start ups is extremely low and therefore it is because angels helped create 50,000 start ups that 3000 companies reached a stage where they could take VC money and grow. This highlights our problem in India. If we don’t create large numbers of new start ups where will tomorrow’s companies come from? How can we reap what we do not sow? In the US there are over 26mn small businesses, over 700,000 start ups each year and over 200 angel investment groups. In India we have finally attracted VC and PE money. This has gone up from USD 1bn in 2004-05 to USD 2. 2 bn in 2005-06, and USD 7. bn in 2006-07 and estimated USD 15bn this year. However, virtually all of it is for late stage investments. Start ups and new innovative ventures still struggle for funding. Finally, there is a silver lining. More and more people are willing to quit good jobs and become entrepreneurs, more and more start ups are happening around innovative products and ideas and angels are beginning to come out of the woodwork. The trend has been set by the Indian Angel Network, till recently called the Band of Angels. REFERENCES: www. indianangelnetwork. com www. google. co. in www. nenonline. org www. indianinvestmentnetwork. com Businesswire India’s press release