The world is evolving faster than ever with technology entering into each aspect of life. And in increasingly favourable access to capital, it is the new-age lean companies that are likely to shape the future.
Pointing to the same, as per an international study, the average tenure of companies on the S&P 500 was 33 years in 1964 which reduced to 24 years in 2016. It has been forecasted to shrink to just 12 years by 2027, with PE/VC investments and growth of billion-dollar valuation start-ups leading the change.
Thus, in such a dynamic world, it is important that one must be open to new ideas and investment vehicles if wealth-generation is the goal! With easier rules and a liberalizing regulatory regime, investing in unlisted companies i.e. early-stage ventures is a very useful avenue for wealth-generation.
In fact, if done well, it has the potential to make outsized returns that far exceed the returns on other types of investments.
1 – No Other Asset Class Giving Good Returns
Real estate & equities have given below 5% returns
The traditional investment products promise a safe and steady return. But these are seldom enough to beat inflation over the long-term, leave alone enable wealth generation. Below is a comparative illustration of some of the most popular investment options in the last 4-5 years.
Comparably, angel investing in startups as an asset class will be a good diversification of portfolio and will have the potential of giving superior returns. In these investments, you are much more in control of your investment as compared to other asset classes. You can also grow it further by investing your time and mentoring to grow the Startups you have invested in.
One successful angel investment can give you a lot of financial freedom which everyone aspires for.
2. No Recession In Startup Funding
There is strong capital inflow signaling growth
Contrary to the public markets, where IPOs have dried up in the past two years, the startup funding scenario continues to blossom in India. In fact, apart from a dip in 2016, funding has increased each year from the previous one this decade.
The acquisition of Flipkart by Walmart last year was the 1st mega exit for angel and early-stage investors that provided a validation of the funding and market potential in India. In a continuing sign of maturity of the ecosystem, there are continuously greater sums of money being raised in later rounds by established startups.
3. Angel Investing Is NO More A Territory Of Only The Super-Rich
The threshold has gone low and is much easier
Angel investing is a wonderful way to add a high-risk, high-return asset class to one’s portfolio, and is absolutely critical to progress towards wealth generation in the longer run.
It’s not just the super-rich who have the opportunity to invest in startup businesses, but it is now easier than ever for working professionals or employees of private-sector organizations to be able to evaluate and invest in startups in a transparent and convenient manner.
With angel investment networks abound in the country, the costs involved in investing are getting lowered drastically. Not only do most angel investment groups handle the entire legal documentation and coordination with invested startups, but the minimum ticket size is also fairly low as the overall investment is effectively money pooled from multiple sources.
4. Catch Them Young
95% of gain is made by the time companies get listed for public
In the 80’s and 90’s the most value creation in the US happened for those investors in the Public market, who bought stocks in tech giants like Amazon and Microsoft after they IPO’ed. Now, however, the private equity space is more robust and fruitful for businesses.
Most of the value creation has shifted to early-stage private company investors. In fact, if one were to wait until a startup went public to invest, they could be missing out on 95% of the gains, which are often accrued by investors before the IPO.
*Source: Funders Club
Similarly, the behemoths of the Indian startup ecosystem (Flipkart, Paytm, Ola, etc.) have given manifold returns to its early-stage investors. And most of these leading Indian startups, the new-age technology-fueled corporates are yet to even enter the public markets. But this does not mean the best time has passed. In fact, it’s only starting, and for a young country like India, the best years are certainly ahead of it.
5. Pro-Entrepreneurship Regime
Increased startup liquidity and infrastructure and tax implications for investing have been removed
Not only the access for investing in startups was limited earlier, but the startups themselves were growth constrained because of regulatory challenges, lack of infrastructure, acceptance of business models and access to capital. Whereas now, the startup ecosystem is getting bolstered with each passing day.
In this first decade, entrepreneurs of India have tasted blood (read ‘success’). With our young population and a multitude of existing challenges (read ‘opportunities’) in the country, the path is set for the startup story to grow manifold in years ahead.
As the saying goes, “there’s no better time than now to start investing and ride this growth story.”
6. Stay Relevant To Latest Technologies And Be Part Of A Strong Network
Technologies and Startups go hand-in-hand when it comes to incorporating the latest advancements in the current market. Relevance is another factor that adds more gravitas to the service/product being developed by startups in almost every sector.
Furthermore, the use of the latest technological developments leads to cost-effective benefits for the business. As compared to the large service providers, startups are more flexible in implementing appropriate new technologies that meet the business requirements.
Another important aspect of working closely with startups is that you understand the present-day challenges being faced by businesses and also learn the art of setting it up from scratch. This also sets the foundation for your upcoming business ideas.
Association with Angel networks also helps you to develop long-lasting relationships with like-minded individuals, which can be super helpful for your own professional and personal growth.
7. Contribute To Nation-Building, Job Creation And Growth Of The Country
By 2020, India will be the third-largest base to startups after the US and the UK, with more than 11,000 startups in the country. Through both words and actions, the top-most echelons of the government have lauded and promoted entrepreneurship.
The Prime Minister of the nation, Shri Narendra Modi has repeatedly extolled its virtues, “I see startups, technology and innovation as exciting and effective instruments for India’s transformation”.
However, our startup ecosystem needs a lot of development to increase the success probability of startups.
By supporting new entrepreneurs you can play a major part in shaping leaders of tomorrow through your experience, mentorship and guidance. This will help the economy in which more jobs will be created, and hence you will contribute to nation-building in your own way.
Most seasoned angel investors confess that investing in a startup and riding its journey teaches much more than learning one gets in their regular job. If you have the risk appetite, don’t miss out on this asset class for the sake of convenience with an old investment instrument. To quote Robert G. Allen (Author of ‘The One Minute Millionaire’),
“Thriving investors don’t play it safe. How many millionaires do you know who have become wealthy by investing in savings accounts?”
About the authors –
He is also the Founder of Wellcure. He was earlier Co-founder & CFO of Nearbuy and also Finance Director – Asia Pacific Region in Groupon Inc. He is a Chartered Accountant by qualification and spent the first 8 years of his career with Audit and M&A Consulting practices of KPMG.
He is an IIM Bangalore alumnus who also engages with startups in areas of financial planning, operations and process improvement. His previous roles include working on Rajasthan Government’s startup program iStart with KPMG and Financial markets trading at Futures First.
About Inflection Point Ventures (IPV) – It is an early-stage angel investment group that provides a platform for individuals to embark or continue on their angel investment journey. With the core team consisting of Serial entrepreneurs, CXOs at Top Indian startups, VC partners and Angel investors who’ve been investing since at least last 8-10 years, it showcases exciting startups to its members and provides them an opportunity to invest in them. Among other benefits, the angel investor group ensures transparent channels of communication, and a convenient medium to connect with its investee companies for the investors.
Fill up this short FORM, if you are keen to join the group.
Note – This article was first published on Inc42
Startups are evolving like never before; but they often struggle to get listed and go public. In 2015, they were recognized and considered under the guidelines of SEBI to facilitate their listing. But despite such measures, Institutional Trading Platform (ITP) failed to encourage startups due to its stringent requirements.
In this regard, with relation to provisions of SEBI (ICDR) regulations, several recommendations were made, which eventually assisted them to review and create a new system/framework termed as “Innovators Growth Platform” (IGP). The aim of this initiative/system is to encourage more startups to go public.
Start-ups were desperately struggling to raise funds after Series C / D. It was indeed essential to raise funds from investors other than VCs and angel investors, which gave way to the new system that has simplified their path to go public. Besides that, it has also cleared the exit path for angel investors and early promoters/investors.
New IGP framework proposes the following:
In view of this initiative by SEBI to have IGP as a discrete platform for start-ups, is giving them a boom and encouraging to get listed. If start-ups actively consider this option to go public, then there’s no stop on the potential this segment would bring on the nation’s economy. This motion is beneficial for start-ups whose real struggle begins after Series B to raise capital. Though these relaxations have definitely pruned journey of start-ups to IPO, but story doesn’t end there, rather it begins!
About the Author
Mitesh Shah is a co-founder at Inflection Point Ventures and the Head of Finance at BookMyShow. He was previously the CFO at Ola Cabs and VP, Finance and Corporate Affairs at Being Human Clothing (Mandhana Industries Ltd).
He is a Chartered Accountant by qualification, from the Institute of Chartered Accountants of India.
At Inflection Point Ventures (IPV), as we are trying to democratize ‘Angel Investing’ in India, we get to meet a lot of first-time investors. They are super keen to be part of the start-up world but don’t have much idea on how early-stage investing really works. That motivated me to put down my learnings and readings till date which might help many who are waiting on the edge to start their start-up investment journey. Starting with the basics….
Who is an Angel Investor? –
A person who invests in early-stage startups primarily with a strong belief in the founding team or the product and helps them grow.
1. They can be professionals like doctors and lawyers or corporate executives or successful entrepreneurs.
2. They love the thrill of spotting the entrepreneurs who are most likely going to change the way the world does something today.
3. They find good deals, negotiate well and do proper due diligence on founders and the target market.
4. Angel Investors accept higher risk and demand very little control in return for a share in the company.
At IPV, we are primarily a group of 250 CXOs but more people are joining us from other professions, looking at our execution experience of managing mid to large scale companies.
How much do Angel Investors invest?
The range can be anywhere from Rs.5 lacs to 2 Crores depending upon the financial risk capacity of the individual. In past the thumb rule was to not invest more than 5% of your portfolio in start-ups but looking at the stagnancy in stock and real estate markets, people are now investing a higher proportion in start-ups.
At IPV we have tried to make it further easy by lowering the minimum investment to Rs.2.5 lacs for people to start their angel investing journey. We were surprised that many founders were even ok to accept Rs.1 lac from our investors as it meant adding a lot of experiential capital of the CXOs to the cap table.
How Angel Investors find the right start-ups?
Though there are many factors to assess but to summarise, it’s the team, target market and the traction, which the Angel Investors look for while choosing the right start-ups –
The Right team –
1. Are the founder’s best suited to exploit the opportunity from their experience and past success?
2. Are they frugal, optimistic and cohesive as a unit?
3. Do they know their business in depth and don’t make only passionate & assumptive statements?
Target Markets –
1. Is the problem big enough to solve?
2. Will the customers pay for getting their solution?
3. Will it make a difference to customers, if that solution is removed from their life? Will there be repeat purchases?
1. Has the start-up built a product with differentiation from the possible competition?
2. Is there a measurable set of customers already there?
3. Is there a natural word of mouth about the product?
How do Angel Investors value a Startup?
Though there are many technical ways of valuation like Discounted Cash Flow, Market comparables etc. but most of them don’t apply on Startup valuation as there is hardly any past data or comparative companies available in early stages of a new idea. At this stage, Founders are normally looking to dilute 10 to 30% of their company depending upon the need of funds.
As a thumb rule, any pre-revenue stage startup with a good team and product is valued around 1 to 2 Million USD (Rs. 7 to 14 crores). However, that can be broken as below –
1. Good idea – Rs. 1.5 to 2.5 Crores
2. Ready product – Rs. 50 lacs – 1.5 Crore
3. Solid Team – Rs. 2 – 4 Crore
4. Strategic relationships (Go to market) – Rs. 50 lacs -1.5 Crore
5. Product rolled out/Sales started – Rs. 1.5 to 3 Crores
6. Other risks such as political, regulatory, competition, funding and talent availability can be adjusted to the valuation in the range of Rs. 50 lacs to 1 Crore, subject to the respective existence of such risks or not.
After the above, the largest factor that comes into play in deciding the startup valuation is how badly investors want to invest in the startup or how badly the founder needs the funds and is willing to accept the terms.
How do Angel Investors get an exit or make money on their investment?
There are 5 ways in which Angel Investors make money –
1. Larger investor gives an exit – Most of the large investors give an exit to small investors post a company raises Series A funding, upwards of 1 to 5 million. This is primarily to simplify the cap table and reduce the noise and risk of having too many shareholders in the Company.
2. The startup is acquired by another company – Large companies are always looking for inorganic growth by acquiring smaller companies with a good team and business model having synergies with their large scale business. In such cases, the investors get cash or equity in the large company or a combination of the two.
3. Startup goes public – Except for a few cases like Justdial, Infibeam, BharatMatrimony and MakeMyTrip, the list of Indian internet startups that have done an IPO quite short. With BSE launching a Startup IPO portal and making it easy for startups to do an IPO a lot earlier, we now expect the trends to change and see a lot more startups to take the IPO route.
4. Startup becomes big and pays regular dividends – This again is also a bit rare in till now in Indian Startup ecosystem as it takes a lot of time for companies to reach a profitable stage and even if they do, the investors and the founders are always investing profits for company growth than to give dividends to their shareholders.
5. Selling their shares to other parties – This is called secondary sale and is mostly dependent on the demand for the equity for a particular startup. There are no secondary markets for startup equity so unless the startup is a real hot one, the secondary sale of its shares is quite rare.
How much return should Angel investors expect from their investments?
Normally only 1 out of 20 startups reaches a success level where the Angel Investor gets 10X to 300X of their investments. So the probability looks low, but the startups that make to the success lane are usually those whose early-stage investors engage with them to help them grow. So Ideally, every investor should forget the money invested in Startups but focus more on helping the Startup grow by staying engaged. That is one of the best ways for Angel Investors to grow their investment exponentially. Practically in the current scenario in India, the angel investors get around 3 to 10X return on the successful investments in 3 to 4 years time.
Hope this article helps everyone who wants to start their journey as an Angel Investor in startups.
About the Author
He is a Chartered Accountant by qualification and spent the first 8 years of his career with Audit and M&A Consulting practices of KPMG.
Anyone interested to learn more about Angel Investing in grown-up markets like the US can read this book ‘Startup Wealth’ by Josh Maher. Here is the Amazon link to buy the same.
Inflection Point recognizes some of our members are first-time angel investors. It is a responsibility we do not take lightly. This blog is dedicated to all our members who are entering the wonderful, exciting, financially rewarding, yet an extremely uncertain world of angel investing through our platform. We interviewed some individuals who have been able to achieve success through angel investing and tried to understand what motivated them towards angel investing and what are the key lessons they learned that can be helpful to the new investors. We have tried to capture their thoughts in a mix of DOs and DONTs. It may not lead to 100% success, but we hope it answers some of the questions that you always wanted to ask. As Eleanor Roosevelt famously said – “Learn from the mistakes of others. You can’t live long enough to make them all yourself”.
1. Evaluate the Product/idea
Start-up’s idea/product should have a strong and defensible competitive advantage with large addressable market size and good growth opportunities. It is helpful if you are or know someone who is / can be the target customer of the start-up’s product but it is not mandatory. We should also be careful to not let our personal bias affect our investment decision – just because you don’t want strangers to stay in your house doesn’t make AirBnB a bad business idea. At IPV, we have a strong preference for the ideas that we can help grow through our network.
2. Numbers don’t lie
While you can’t rely on five-year projections (also called as founders’ hopes and dreams), you should at least investigate how the start-up plans to spend your money. You should also ensure that the start-up has a scalable business model and path to profitability. One of the criteria we examine at IPV is if the customers will pay for the product or service and whether the business can turn profitable in the next 3 – 5 years.
3. Address the valuation Dilemma
Startup valuation is both science and art, actually more art than science. Valuation is driven more by factors like Founders experience, FOMO (fear of missing out on a hot sector by the investors), growth potential etc. rather than more established valuation methodologies. Still you want to structure the investment so as to have the possibility of generating a 50 percent rate of return to compensate for the start-ups that don’t succeed. And while there are no right answers, it may be better to invest in a high growth company at a higher valuation than investing in a struggling company that is available for cheap (unless you feel strongly about the founders/idea and can contribute more than just capital).
4. Understand your risk tolerance
Start-ups have a high risk of failure though potential returns can be exponential too. Hence a question you should ask yourself is how much money are you actually willing to invest and potentially lose? In this risk and return game, you need to understand the depth of the ocean before taking the dive. At IPV, we have tried to keep the minimum investment ticket size of INR 2.5 lakhs (for most start-ups) for this very reason. While seasoned investors can invest more, and most of them do, first time or new investors have the flexibility to start small.
5. Diversify your portfolio
Don’t put all your eggs in one basket. If the handle breaks all you will be left with are scrambled eggs. For any company, there is a relatively high risk that the company will fail altogether, no matter how good it looks and how confident you feel about the idea/founders/ business model. By having a broader portfolio, your portfolio won’t be ‘all or nothing’ like it is with just a single investment. We will typically recommend that you diversify the amount you have set aside for angel investment across 5 – 6 start-ups to improve your chances of success. At IPV, we will showcase approximately 20 start-ups every year giving you some good options to choose from.
6. Invest in people.
When investing in a start-up, you are not merely investing in a product or an idea. You are also investing in the founders. What drives the investment decision to a large extent is the reputation, track record and goals of the founding team. The product or idea may change many times during the business life cycle but you need to evaluate whether the founders are passionate, skillful and motivated enough to stick it out and play the long game. IPV scorecard (part of our due diligence process) has an entire section dedicated to founders analyzing their industry experience, clarity of thought and purpose etc.
7. Think in 10-year horizons.
Even though as angel investors you can expect to get an exit in 3 – 4 years but remember that on an average it may take a business 7 – 10 years from VC investment stage to eventual exit via strategic sale or IPO. Consequently only consider investing money that you don’t need in the immediate future.
1. “You know nothing, John Snow”
While it is tempting to invest in ideas where you think you can contribute more than just capital, don’t make this your sole investment criteria. Many start-ups are trying to solve existing problems that we may not be able to appreciate or may even be biased against. Our biggest strength as angel investors is that we are willing to bet on an idea and people.
2. It takes a village to raise a child
The start-up’s financial projections and the built-in exponential growth can neither be fully reconciled nor justified. So don’t look at the financial model alone. It is important to analyze the business as a whole. In addition to the point #2 of Dos, it will also be good to understand more about the product, the problem they are trying to solve, potential market size, founders’ experience, and potential exit opportunities. At the same time please note that ideas can grow exponentially in a very short period of time. Just look at how OYO is challenging the traditional hotel industry.
3. The more I practice, the luckier I get
At IPV, each start-up goes through rigorous due-diligence. Whenever an idea comes to IPV, the same is analyzed by 9 core IPV team members. An idea needs at least 3 “yes” for it to be invited to present to the broader investment group. Post the founders’ presentation, 2 members from the core IPV team and a lead analyst conduct detailed due diligence. Industry experts are brought in to support the due diligence process as and when required. IPV members’ base includes CXOs, doctors, bankers, lawyers, entrepreneurs which provide us a rich base to choose from. Findings of the due-diligence are shared with the IPV members on a commitment call. The whole process takes 2 – 6 weeks. Our recommendation is that, post the commitment call, don’t spend longer than 2 – 5 days evaluating a deal. You will never have all the answers and angel investing is also about trusting your instincts.
4. “Those who expect nothing, don’t get disappointed”
It is not common for individual angel investors to get Board seats, preferential rights etc. unless you are investing a sizable amount. So don’t have such expectations. However networks like IPV give you an opportunity to invest as a group and as a group, IPV tries to negotiate the best possible terms for all its investing members. We have been able to get Board seat, Board observer seat, access to the same information as other large investors for most of the start-ups we have invested in as a group.
5. “I will prepare and someday my chance will come.”
While it is exciting to invest in sectors that are considered “hot” in the VC space, but there is a new hot sector every 12-18 months. So don’t invest on the basis of trends, hearsay and rumors. Verify and evaluate before you invest. IPV founders’ call and commitments calls are run on a digital platform that allows all members to dial-in and participates from anywhere in the world. Members are encouraged to ask their questions and then participate in a feedback survey (at the conclusion of the founders’ call) where the members can share any additional questions they may have.
6. “What doesn’t kill you makes you stronger” Not all investments will be successful. It is the only constant in the uncertain world of angel investing. So, don’t forget to take note of the risks involved in the investment and learn from your investments that don’t succeed.
Hope all that has been shared above will help you become a better Angel Investor. Wish you all the very best.
– Ankur Mittal
Seasoned Angel Investor & Co-founder – Inflection Point Ventures
Head of Asia & Middle East – Training the Street
Compliances and Procedures for NRI Investment in India
FOR NRIS INVESTING IN INDIA –
Under Foreign Investment in India guidelines, all NRI investments can be invested in Repatriable or Non-Repatriable basis. 3 major differences of the same are highlighted for understanding the concept –
Repatriable – Fund has to come from a Foreign Currency account of the Investor i.e. NRE or Foreign Bank account
Non-Repatriable – Source has to be in Indian Rupee or payment from Rupee account (NRO/Current/ Savings account of the NRI)
Repatriable -The sale proceeds of the investments including profit earned in India and income earned (net of applicable taxes) can be transferred back to their foreign currency account i.e. NRE or Foreign Bank account
Non-Repatriable – The sale proceeds of the investments including profit earned in India and income earned shall not be permitted to transferred back to their foreign currency account and this has to be remitted to NRI’s Rupee account i.e. NRO/Current/ Savings account
Repatriable – Foreign Investment (NRI) is allowed under the automatic route without prior approval of the Government or the Reserve Bank of India (the present Business covered under automatic route) however some post Investment intimation / approvals are required from RBI. Further during repatriation back also some RBI intimation / approvals are required
Non Repatriable – This will be treated as the issue of shares to Indian public hence post or pre approvals are not required
FOR ORGANISATION RECEIVING THE INVESTMENT –
Detailed Procedure of Post Investment intimation / approvals to be followed by Company receiving investment.
Organization receiving foreign investment must report the transaction to the Reserve Bank of India in the stipulated timeline.
Within 30 days of receipt of share application money/amount of consideration from the foreign investor, the Indian company must report details of the FDI inflow to Reserve Bank of India, containing the following details –
The money received from the foreign investor for the purchase of shares in the Company is required to issue shares within 180 days from the date of inward remittance to the foreign investor.
Within 30 days from the date of issue of shares, form FC-GPR must be filed with the RBI along with the following documents.
While repatriation back also Investor needs to provide FC GPR approval and certificate from the Chartered Accountant for tax payable and proof of payment of Tax etc. need to be filed through AD (Authorised Dealer Bank).
All this process to be done by a CA/CS firm will cost around INR 15k to the Company on average. Anyone needing any further guidance on this can contact Mr. Shivadutt Bannanje at +91-9845286251 or firstname.lastname@example.org
Rome wasn’t built in a day. So is any startup. It’s a carefully mixed concoction of an innovative idea, a the hand-picked team, well-thought-out strategy, and marketing blended together with a hunger for success. But to ensure that this healthy mix has a long shelf life, there are few tips that you need to follow. From a carefully drafted mission statement to aim for more than just the capital, building a healthy startup is an art that fortunately can be understood and adopted without much investment.
So let’s get started.
1. Mission and Vision: Every startup has to have a carefully crafted mission statement. These words and language will impact both your clients and business partners as well as the talent that you hire. Well, not just that, a clearly stated mission will give your team a direction to build their team and the company in a certain way.
2. Build a robust culture: Picking a team may not be that tough as it is to keep them self-motivated and value-driven. Thus ensure that while hiring, it’s not just the talent that you seek but also a candidate’s character, personality and values. Bring someone who may not have many years of experience but surely has passion to learn, work with a team and a goal.
3. Think out of the box: This one applies both for cost and marketing. You don’t always need expensive performers. Try out younger, less expensive staff that may have something different to offer with results too. As for marketing, splurging won’t take you far, ideas will.
4. Transparent communication: An open communication platform is directly proportional to a healthy work atmosphere in n office. Give your staff the bigger picture so they get the wider meaning, a sense of involvement and importance. Better the communication, more responsive the team. A happier you and a happier team and there you see the results on paper.
5. Get more than just the capital: Investors are important to transform your idea into something concrete and build up your business but so are mentors. You don’t have to make the same mistakes as some others did before you. Choose wisdom over widget. Try different ways. The road may not be smooth but the journey would. Startups are not for faint-hearted. We like to call it the most difficult test of perseverance. Hopefully these pointers will make things little easier for you and help you build a healthy, robust startup.