Economic sentiments down, but angel investors most active in 2013

BANGALORE: Dozens of startups across the country raised seed money this year as India’s top angel networks stepped up investments across sectors. Mumbai Angels and the Indian Angel Network, the two largest groups closed over 25 investments boosting availability of early stage capital.

“The overall economic sentiment may have been down but it has been the most active year for angel investing,” said Rajan Anandan, Google’s India head who is also a member of Indian Angel Network (IAN).

Anandan invested in 10 startups, taking his overall tally in India to 40. The companies that he funded this year include social media customer support provider Airwoot, data analytics firm DataWeave and mobile app development platform Snaplion.

The appetite for early stage investments in India continues to rise, this year 45% of all investments made in the country went to startups compared to 41% in 2012 and just 36% in 2011.

Risk capital investors closed around 162 early stage deals worth over $600 million (over Rs 3,700 crore) until the end of November, according to consultancy EY.

IAN signed 18 term sheets and completed 11 investments in companies like food technology firm Mukunda Foods and online marketplace for co-operatives and community-based enterprises GoCoop. The network, founded in 2006, has also expanded its reach beyond India.

Last year, the network had partnered with Sri Lanka-based Blue Ocean Ventures to invest in startups from the island nation. So far it has made about 14 investments in Sri Lanka. This year IAN announced plans to launch a UK chapter as well.

Padmaja Ruparel, President of IAN, said interest in angel investing has gone up dramatically. “We have had lots of individuals reaching out to us. Angel investing is becoming a serious asset class,” she said. This is a view echoed by Mumbai Angels.

“Now India has about 600 active angel investors. That is an improvement from previous years but there is room for more,” said Ashpi Gupta, AVP of Mumbai Angels. The network, which includes about 200 members, made 14 investments this year including investments investments in career analytics firm Skillwiz, ecommerce firm Purplle and online holiday planning site WeAreHolidays.

Smaller younger networks too stepped up their investments in 2013. “This has been our most productive year in terms of number and value of investments,” said Sameer Mehta, a member of The Chennai Angels (TCA), which made seven investments. Calcutta Angels, launched this year, made its maiden investment in Ketto, a crowd-funding platform.

Ravi Gururaj, cofounder of Harvard Business School Alumni Angels, struck a note of caution. “It is not for everyone as this is a high risk asset category,” said Gururaj, who also heads Nasscom’s Product Council.

The few exits shown by older networks like IAN and Mumbai Angels is also leading to interest in the sector. IAN has had eight part and full exits since 2012 and has seen returns of up to 22 times of investment. Its exits this year include online hotel booking site Stayzilla and data protection firm Druva.

Mumbai Angels, on the other hand, has had seven exits since 2011. Its exits this year include multi-language messaging application Plustxt, which was acquired by One97, and online mobile billing aggregator Qubecell, which was bought out by San Fransisco-based mobile payments firm Boku.

“In India, especially in the technology space, it takes 10-15 years to build a great company like JustDial or Infoedge,” said Anandan. “Angels should look at this as an 8-10 year game.”

Venture Capitals seek Angel Investors to grow Seed Portfolio

MUMBAI: Top-tier venture capital firms in India are roping in successful entrepreneurs and executives as coinvestors as they look to build a portfolio of seed investments. SAIF Partners and Sequoia Capital India are roping in top Silicon Valley engineers like Greg Badros and serial entrepreneurs like UnitedLex’s Ajay Agarwal to help mentor these startups.

While venture capital firms certainly have the cash to invest, they are limited in terms of bandwidth to mentor these companies as they are focused more on their larger bets. The mentoring required could range from technical to operational to networking.

SAIF is looking to bring in angel investors at a time when it is making an aggressive push towards expanding its seed portfolio.

VCs Feel Startups Scaling Up Faster

“One of the big questions over the last 12-15 months is how do we start to support these startups given our bandwidth,” said Mukul Singhal, principal at SAIF. By roping in angels, SAIF Partners would help the startups get mentoring and angels would also have “skin in the game.”

For instance, it recently led a $500,000 investment in New Delhi-based Appiterate, which helps publishers optimise mobile apps. After its investment, SAIF introduced the company to Greg Badros, who was earlier a top engineer at Facebook and Google. Badros along with Prashant Malik, another former engineer at Facebook, also participated in the round.

“While SAIF is very strong in the Indian market, our product was targeting a global customer base. We wanted someone well known and connected in Silicon Valley,” said Tanuj Mendiratta, cofounder of Appiterate. This strategy has also been adopted by Sequoia Capital which has worked with serial entrepreneurs like Agarwal, Sashi Reddi, Dhiraj Rajaram and Rajul Garg on investments.

“We invite current or past entrepreneurs to serve as advisors and mentors to our younger portfolio companies, where they can bring domain knowledge and their insights from company building to benefit startups. Often, these will manifest in the form of co-investments with Sequoia Capital or advisory/board seats for our more experienced entrepreneurs,” said Sequoia MD Shailendra Singh.”

Reddi, whose firm AppLabs was acquired by NYSE listed CSC in 2011, co-invested with Sequoia Capital in Shopo which was acquired by Snapdeal last year. Agarwal, whose new venture Sirion-Labs is backed by Sequoia, said that some of these startups have new business models which need to be proved and require less capital at earlier stage.

“Ability of VC firms to allocate resources to manage and mentor these investments is not available, which they offset by leveraging intelligence of entrepreneurs who have cashed out of their companies,” said Agarwal, who has worked on three such undisclosed investments with Sequoia.

Garg, who co-founded Pine Labs and GlobalLogic, said that there is no formal structure to such deals which create a future pipeline for VCs. “They may come across a deal where capital requirement is small and refer those deals to us for an investment,” said Garg, who makes angel investments in technology and healthcare. His investments like hospital management firm Cygnus and healthcare focused e-tailer Healthkart have seen participation from Sequoia.

VC firms’ push towards seed deals comes as they feel startups are scaling up faster and quality of entrepreneurs has also significantly improved. Interestingly, both SAIF and Sequoia have also backed Sasha Mirchandani’s seed stage firm Kae Capital as limited partners (LPs) in 2012.

“Scaling up is faster since market sizes have become very sizable. Because of social media layer, distribution mechanism has become easier and cost of experimentation has come down,” added Singhal. Back in 2011, SAIF had also roped online travel portal MakeMy-Trip founder Deep Kalra as investor in apparel e-commerce player Zovi.

SAIF which has been an early backer of companies like OTA MakeMytrip and local search engine JustDial, is seeing more promising startups and plans to make 7-10 seed investments ranging from $200,000 to $1 million every year. SAIF Partners has a team of three looking at such deals. The venture capital firm actively started looking at seed companies in 2013 and now sees over 100 deals a month.

Start-ups get budget push

Finance minister P Chidambarams new measures to support the countrys start-up ecosystem, including recognising angel investment, giving CSR status to tech incubators within academic institutions and providing a pass through status for venture capital funds, has struck the right chords.

Chidambaram said that angel investors, who currently do not qualify under any category of Securities and Exchange Board of Indias (Sebi) alternative investment funds (AIFs), will now be recognised under Category-1 of the same, joining venture capital funds, social venture and SME funds.

This will encourage local fund managers to set up AIFs for raising risk capital for startups within India. This move will definitely support the startup scene in the country, said Sunil Goyal, CEO, YourNest Angel Fund.

Angel investment is critical for the country in terms of job creation and investments and is a free flowing activity around the world, Padmaja Ruparel, president, Indian Angel Network (IAN) told FE, adding that we will work with Sebi to see in what manner AIF Category-1 can be applied to angel investors.

Booting startups may now become easier due to the announcement of granting CSR status to technology incubation funding within education institutions. The industry however feels that currently more such incubation activities take seed outside educational institutions, and hence want this provision to apply to private incubators as well.
But the government sees this as a first step towards that. This will provide the commercial knowledge that is required for the budding entrepreneurs at the academic institutions. If the corporates give money they will monitor those incubators and foster a partnership there. We are looking beyond capital here, Harkesh Mittal, secretary, Technology Development Board (TDB), told FE.

He added that since the government has announced its plan to develop 1,000 incubators in the country over the next five years from the current 120 this will give the resources and capital for achieving that target.

The FM also pointed out that, venture capital funds have been allowed pass through status under the Income-Tax Act. TCM Sundaram, founder and MD, IDG Ventures India Advisors, says this doesnt change anything at the ground level as VCs have already got pass through status last year. This is just a transfer from domestic VC funds to AIFs, he said.

Changing trend in angel investing: Businessmen, senior executives rush to join IAN, Mumbai Angels and others

MUMBAI: Angel investing – affluent individuals providing capital for startups – has been the preserve of serial entrepreneurs. But increasingly, wealthy businessmen and senior executives from a diverse range of industries are joining them and, in the process, reinventing this high-risk investing segment.

Anand Ladsaria, 53, exports spices and fragrances through his company, Everest Flavours. He has invested Rs 10-25 lakh each in around 20 companies operating in new-age sectors like education, mobile application development, and retail services. “This started with curiosity,” he says.

“But later, I realised the dreams of these entrepreneurs mirror the possibilities for the Indian economy.” On the tenth floor of Dalamal House, a swish office at Mumbai’s Nariman Point, Karan Singh, the director of ACG Worldwide, a packaging products maker, is overseeing a shift in the investments made by his company and him personally.

The 30-year old has made 20-odd investments under the ACG brand and five personally. One of them, Apalya, a white label mobile video aggregator, was a “wildly successful” exit, he claims, and that has made him hunt even harder for similar blockbuster deals. The other companies in his personal portfolio include Onward Mobility, a mobile application developer, and Asiatic Clinical Research, a clinical research organisation.

Nascent Ecosystem in India Gopinathan Padmanabhan spent three decades in the IT industry before trying his hand as an angel investor. The executive vice-president and head of global delivery for MphasiS, an IT services outfit, has invested in three companies, including one producing streaming media content for mobile phones.

Rafique Malik, the chairman of Metro Shoes, claims to have exited mKhoj, mobile value-added services vendor, with a 25-fold return on his investment. This has emboldened him to hunt for more deals, including outside his areas of strength. “I spend one day a month with my portfolio and am open to new opportunities,” he says.
He has also invested in Serial Innovations, a provider of defence technology products, and Asiatic Clinical Research.

Waiting list

Angel investors, typically, invest as little as Rs 10 lakh in start-ups and also spend time mentoring entrepreneurs in their portfolio. Typically, They bet on the pedigree of an entrepreneur and the growth rate of his or her business.

In the United States, angel investors have mainly comprised serial entrepreneurs or venture capitalists who can help wannabe entrepreneurs flesh out a business plan to reach target markets and groups. In the US, there were about 61,900 angel investment deals in 2010, according to the Centre for Venture Research.

In India, that number in the same year was barely 500, says Sasha Mirchandani, founder of Mumbai Angels. Groups such as Mumbai Angels often pool their monies and invest in promising start-ups. This yawing gap can be attributed to India’s nascent entrepreneurial ecosystem, where there are few serial entrepreneurs to guide greenhorns.

Alok Mittal, managing director of Canaan Partners, a venture capital fund, and an active member of IAN, says the immature start-up ecosystem is driving the growth of the angel investor network in a different direction. “In the US, successful entrepreneurs dominate,” he says.

“In India, it’s a mix of entrepreneurs and executives. “Angel investment clubs such as the Indian Angel Network or Mumbai Angels are seeing a flood of senior executives signing up to fund and advise an assortment of startups. They are hoping to cash in on the promise of a segment that, for the moment at least, promises higher returns than conventional asset classes such as equities and real estate.

This growing interest in joining the angel investing bandwagon can be seen with the demand for membership at Mumbai Angels, which had 80 member two years ago and today has around 120 members. The forum is now taking a breather in new membership to organise itself better, by grouping its members by industry or by verticals, and by providing expertise to its portfolio.

Mirchandani says there are 120 people waiting in line to become members. One of them is advertising industry veteran Ravi Kiran, who first approached Mumbai Angels in December 2010 to become a member. “I have attended three meetings of Mumbai Angels and informally advised four companies,” he says.

The former Lintas and Starcom honcho would like to leverage his two decades of industry expertise to guide start-ups. Over at IAN, membership has swelled to around 170; its Pune chapter, launched a few months ago, already has over 20 members.

New rules

The growing interest among professionals in angel investing has convinced Ravi Krishnappa, a VC industry veteran who cofounded Erasmic Ventures (later taken over by early-stage VC Accel) to assemble a loose coalition of professionals to take a crack at angel investing.

The group is trying to break away from the conventional VC business model: keeping 2% of the funds raised for administrative expenses and 20% of returns for partners and analysts at the firm. It is looking at a leaner business model, where Krishnappa and his associates do their own due diligence on a small number of deals.

Rich Indians warming up to angel investing

BANGALORE: Lured by the prospect of big returns, a number of moneyed Indians are taking lessons on how to invest in startup ventures, an asset class that combines high risk with high rewards. Last week, over two dozen aspiring investors from diverse backgrounds attended a training session in Mumbai where they were taught the nuances of investing early in a startup, popularly termed as angel investing.

“I’ve been interested in it (startups) since the public listing of JustDial (in June), but without an opportunity to learn more, I’ve stayed away,” said Vikas Sethi, founder of financial services company Sethi Finmart.

He attended the two-day session organised by LetsVenture.com, an online platform that links entrepreneurs with investors and the Centre for Innovation, Incubation & entrepreneurship at Indian Institute of Management, Ahmedabad.

Angel investors and entrepreneurs, who spoke at the session, explained the concept of angel investing. In addition, two startup companies made presentations seeking funding, with participants expected to evaluate and ask the right questions.

In less than a week after the session, Sethi, 43, who has so far traded in gold, equity and debt funds, picked the first startup he will invest in. He declined to identify his maiden startup investment.

“Nowhere in any asset class can you hope to make a 1,000-time return,” said Mandar Mhatre, 36, a former executive at JPMorgan Chase in Hong Kong, who also attended the session seeking know-how to build a new profile as an angel investor.

Experts said the rising interest in startup investments from this new class of investors will help boost the availability of rupee capital for local companies. “This could be a solution to the notorious Series A crunch (lack of early stage venture capital),” said Khushalee Vakil, manager of angel affiliations at CIIE, who expects more training sessions will be organised to meet the rising demand.

“It’s a relatively new concept in the high-tech industry, and at the end of the day, they are all angels,” said Sanat Rao, an angel investor, who advises iSpirt, an Indian software product thinktank.

But others recommend that new entrants learn to be cautious while backing startups. Typically, angel investors take between 10% and 20% stake in a startup with the option to go as high as 30% depending on the risk involved.

But on the flip side, the industry average points to just two or three startups out of ten succeeding.

“I would be cautious in setting expectations, especially if there are people looking at it only for return on investment,” said Sundi Natarajan, an angel investor, who has backed a number of startups through the Indian Angel Network, in addition to funding robot maker Grey Orange Robotics. He typically invests up to Rs 1.2 crore in a company. “Angel investing is not like an MBA that can be taught; it is born out of passion,” he said. But thanks to examples such as Flipkart — its valuation crossed $1.5 billion (Rs 9,200 crore) — and restaurant listing service Zomato, which raised Rs 227 crore this year, wealthy Indians are hankering to get a slice of the action. Mhatre, who is looking to invest across diverse areas, said he would like to devote about 5% of his liquid assets in startups, and calls angel investing “a slot between gambling and equity”.

Forty-year-old Vijay Talreja, former vice-president of Accenture India, said he has invested in all asset classes, including equity, mutual funds, real estate, and wanted to try his hand at angel investing, before turning to art and wine. He has bought a 15% stake in a personalised retail apparel store and 3.5% stake in a big data and analytics firm so far. “I am looking at riding my experience in the software and financial services industry,” he said.

Many of these new entrants said they would also look to join the top angel networks, with many having applied for membership at the Mumbai Angels Network. Sethi of Sethi Finmart expects to allocate up to 10% of his liquid assets for investments in some 10 startups through networks such as Mumbai Angels Network. “I’d like to go after big names. It is herd mentality, but that’s how I would like to begin, by working with the group.”

Angel Investing in 2013 Approaches Record High: UNH Study

Market Size. The angel investor market in 2013 continued the upward trend started in 2010 in both investment dollars and in number of investments.

Total investment in 2013 was $24.8 billion, an increase of 8.3% over 2012, according to the Center for Venture Research at the University of New Hampshire. A total of 70,730 entrepreneurial ventures received angel funding in 2013, an increase of 5.5% over 2012 investments. The number of active investors in 2013 was 298,800 individuals, an increase of 11.4% from 2012.

The increase in both total dollars and the number of investments resulted in a deal size for 2013 that was slightly higher than in 2012 (an increase in deal size of 2.6% from 2012). These data indicate that angels were active investors in 2013 but those that did invest decreased their individual investments from $85,435 in 2012 to $83,050 in 2013, a decrease of 2.8%. The $24.8 billion in total investments is close to the market high of $26.0 billion that occurred in 2007.

Job Growth. Angel investments were a significant contributor to job growth with the creation of 290,020 new jobs in the United States in 2013, or 4.1 jobs per angel investment.

Sector Analysis. Software remained in the top sector position with 23% of total angel investments in 2013, followed by Media (16%), Healthcare Services/Medical Devices and Equipment (14%), Biotech (11%), Retail (7%) and Financial Services/Business Products and Services (7%). The jump in Media investments from 6th place in 2012 to 2nd in 2013 reflects the growing investor interest in social media and applications.

Stage. Angels increased their investments in the seed and start-up stage, with 45% of 2013 angel investments in the seed and start-up stage, up from 35% in 2012. The biggest factor in this increase was in the seed stage with 21% of angel investments in 2013, up from 9% in 2012. Angels also exhibited an increased interest in early stage investing with 41% of investments in the early stage, up from 33% in 2012. Expansion financing exhibited a significant decrease to 12% of deals in 2013, down from 29% in 2012. Investment activity was evenly divided between new, first sequence investments and follow-on investments, unchanged from 2012. This increase in seed/start-up stage is an encouraging sign since seed capital is the stage of need for our nation’s entrepreneurs.

Valuation. The average angel deal size in 2013 was $350,830, an increase of 2.6% from 2012, and the average equity received was 12.5% with a deal valuation of $2.8 million.

Yield Rates. The yield rate is defined as the percentage of investment opportunities that are brought to the attention of investors that result in an investment. In 2013 the yield rate was 21.6%, virtually identical to 2012 (21.3%). While a high yield rate is an encouraging development for entrepreneurs seeking angel capital there is a question of the sustainability of this rate and it is possible that the yield rate will retreat to the historical average of 15%.

Women and Minority Entrepreneurs and Investors. In 2013, women angels represented 19.4% of the angel market, similar to 2012 (21.8%). Women-owned ventures accounted for 23% of the entrepreneurs that were seeking angel capital and 19% of these women entrepreneurs received angel investment in 2013. It is interesting to note that fewer women entrepreneurs were seeking angel capital in 2012 (16%) but more of those women received angel capital in 2012 (25%). This high yield rate for women entrepreneurs in 2012 may have attracted more women entrepreneurs to the market and account for the increase in the percentage of women seeking angel capital in 2013.

Minority angels accounted for 4% of the angel population and minority-owned firms represented 7% of the entrepreneurs that presented their business concept to angels, figures comparable to 2012. The yield rate for these minority-owned firms was 13%, which is below the market yield rate in 2013. Thus, the goal would be to both increase the percentage of minority entrepreneurs seeking angel capital and increase the quality.

5 questions to ask before you invest in startups

How to choose between ‘angel’ investing and private equity funds

When it comes to private equity investing, investors generally have two options: decide to fund new companies as an “angel” investor, or become a limited partner in a private equity or venture fund and let someone else manage the investments. Your considerations are similar to buying stocks or mutual funds — with some important differences.

As the founder and CEO of an accredited investor crowdfunding platform that offers both direct investments in consumer products companies and investments in funds of companies called Circles, I regularly see investors considering both options. Here are five questions to ask when weighing angel investing versus investing in a private equity fund:

1. How will I achieve diversification?

Private investing, at any stage, is high-risk and illiquid. You need to consider long horizons of seven- to 10 years, and you should diversify. Private equity funds invest in many companies. That’s no guarantee of making money but in a well-managed fund the odds of a total loss are reduced compared to individual investments.

As an angel investor, you are not relying on others to diversify your portfolio, so you must do it yourself. If you’re an angel investor, are you setting aside enough to invest into seven-to-10 deals? If not, you are putting your money at increased risk.

2. Can I source and identify quality deals?

Sourcing is another benefit of investing in a private equity fund. In the tech world sourcing and evaluating angel quality deals is almost impossible for all but about 1,000 well-connected angels. This is true, in part, because the entrepreneurs with the best deals already know where to raise money. That means less-optimal selection for the rest of us.

However, in less efficient markets, such as consumer and retail, individuals can still access the best deals. Moreover, the typical investor may have an easier time evaluating a consumer product business than, say, a mobile app. Platforms can help; CircleUp, for example, features companies that have been vetted by our team of investment professionals.

3. What is my net return?

Fees will eat into your investment return. The typical VC fund has an annual management fee of 1.5%-2.5%, plus carried interest fee of about 20%. Union Square Ventures partner Fred Wilson wrote one of the best posts I’ve ever seen about the expense structure of a VC or private equity fund.He points out that a fund needs to get 4X return on its investments to generate 2.5X in distributions to its limited partners.

To avoid surprises or unnecessary stress, you need to get a good understanding of the expense structure of the fund before putting money into it.  In comparison, angel investors making a direct investment into a company typically will not pay management fees or carry.

4. How involved do I want to be?

Sometimes people invest directly because they love helping companies. Many angel investors are former entrepreneurs and are enthusiastic about sharing their knowledge and expertise.

As an investor in a VC fund you are a limited partner and have almost no connection with the startups and their CEOs. As an angel investor you may be deeply involved. You may have access to the CEO and provide guidance. It’s not uncommon for young businesses to seek angel investors who have experience that is relevant and useful to the company. Are you looking for that sort of responsibility?

5. Am I confident about the people?

People make a company. Does the CEO have a history of success? Do you believe in management’s vision and ability to execute? Are they passionate about the venture and their vision? Do you trust them?

If you are investing directly, look for a platform or network that gives easy access to information about the founders and executives of companies. In this way, you can do thorough due diligence before you invest and can stay in touch after you invest.

With a fund, look also at track record and strategy. Data abounds on VC firm websites, and check out the National Venture Capital Association and the top venture investors on Forbes’ annual Midas List . Does a fund’s thesis make sense or is it a “me-too” approach (i.e. “I will source tech deals better than the 10,000 other managers out there”)?  What is the managing partner’s competitive differentiation and ability to access the best deals and help those companies grow? How does the fund manager think about valuation and do you share that view?

Just as there are momentum investors and value-driven investors in the public market, in private equity there are different overarching strategies that inform a fund manager’s investment decisions. Understand the manager’s investment philosophy before you give it any money.

Do you have what it takes to invest in startups?

One of the best ways to become an angel investor in early-stage private companies is to join a local angel group. More than 1,000 such organizations exist around the world, with at least one in every state in the United States, and at least one in more than 75 countries. What all these groups have in common is bringing together accredited investors who want to put capital to work and assist each other.

The benefits of joining a group include pooling deal flow and capital, domain expertise, and investing experience. Most groups run regular education sessions for new members and provide mentoring for less-experienced investors.

Angel groups over the past decade have become highly sophisticated, with professional trade associations, standardized best practices, extensive syndication, and a generally strong track record. New York Angels, for example, has invested more than $70 million in more than 100 startups over the past several years, and companies in which we’ve invested have been acquired by Google, Intel, Amazon, AOL, Living Social, CBS, Kodak, and other major firms — in some cases with returns of more than 50-100x. (Exits like these are extremely rare, but they do happen.)

In selecting a group to join, first make sure it belongs to its national federation of professional angel groups. In the United States, that would be the Angel Capital Association (ACA); in Canada, the National Angel Capital Organization (NACO). Then it’s important to understand what makes the experience of working with a group different from being an individual angel or investing in a professional venture fund.

As an individual angel investor, you are responsible for your investment decisions. This means you could, in theory, meet an entrepreneur at a cocktail party, hear a three-minute elevator pitch and write a check for a full investment round on the spot. This has happened, but it’s not necessarily the best way to make an investment decision.

Venture capital funds, at the other end of the spectrum, are commercial organizations whose business it is to find the five to 20 companies each year that they believe have a chance of being one of the only 80 companies a year that will ultimately exit in a sale of over $50 million.

Because these funds are highly visible, every entrepreneur is vying to get in front of them for funding. The major VC funds each receive between 5,000 and 10,000 funding requests a year.

Angel groups are between these two extremes. Unlike individual angels, they make themselves available to entrepreneurs (including having a website, soliciting funding applications even from entrepreneurs they don’t personally know, running events, and so on), but unlike venture funds they typically receive hundreds of applications a year instead of thousands. Accordingly, angels who are members of a group are exposed to a healthy but manageable flow of investment opportunities.

The typical U.S. angel group will receive a dozen or more funding applications from startups or referrals from members each month; the most active ones may receive more than 100. Groups also often syndicate investments, working cooperatively to fund rounds bigger than one group can handle. A typical group member invests in one or two companies each year, putting in $25,000 to $100,000 in each. Most groups expect this level of investment from members; some even require it.

In practice, most angel groups work on a monthly cycle, reviewing submissions that have come in during the previous 30 days and choosing five- to 15 for screening. The selected companies, which usually will not have had a previous relationship with anyone in the group, meet with a screening committee of two to 20 angels, who will usually spend at least half an hour hearing the company’s pitch.

The screening committee will then invite three to five companies to return a few weeks later to present their pitch formally to the entire group, usually in a 15- to 30-minute session including questions and answers. If enough of the angels in attendance are interested in hearing more about the company, there will usually be follow-up meetings and due-diligence sessions, resulting (everyone hopes) in either a term sheet for an investment, or one or more angels agreeing to invest alongside other investors that the company has found.

After you’ve participated in an angel group for a year or so, you will have experienced a wide range of pitches, and will have watched first hand as other experienced angels ask tough questions, negotiate term sheets, and go through the mechanics of closing an investment round. At that point, you’ll likely be comfortable enough to start looking at — and investing in — interesting opportunities on your own. 

You can be an angel investor too! But it takes more than a fat wallet to be one

In the past one month, Vikas Kumar, a 32-year old lawyer has been taking lessons. The Delhi-based professional has attended two classes that he hopes will prepare him to join the ranks of a new class of investors, those backing startups.

“I will soon make my first investment, in a prepaid mobile wallet startup,” said Kumar a partner at DH Law Associates who expects to act as the legal advisor for the new venture.

Fired by tales of stellar returns and the thrill of being part of something new, dozens of wealthy Indians are laying out money to buy a slice of the action in India’s booming startup sector. But they soon discover that there is more to being an angel than just cutting a cheque.

Every week at least five startups are launched in India of these typically just one survives to deliver big-ticket returns to eager investors. The ability to pick that one winning company is what rich Indians are now aiming to acquire.

Industry reports estimate that there are about 500-600 active angel investors in India, many of whom are part of fast growing networks such as the Indian Angel Network, Mumbai Angels as well as several city-based networks in Hyderabad, Chennai and Bangalore.

“But there is definitely a shortage of specialists who are willing to put their own skin (money) in the game,” said Raman Roy, a cofounder of IAN who has invested in over 18 startups. IAN formed in 2006 has over 250 members some of whom have received returns of about 32 times the amount they invested, underscoring the attractiveness of this new asset class.

But with just about 50-60 people skilled enough to lead investments in very young ventures there is a huge mismatch in demand and supply of early stage capital. Last year, about $608 million worth of early stage deals took place in India, a fall from $700 million in the previous year according to consulting firm, Ernst & Young.

“There are hundreds of people working in top positions in MNCs with enormous surplus capital that is lying idle,” said Manish Singhal, founder of LetsVenture, a technology-based platform that aims to link potential investors with startups.

The IIT-Kanpur graduate is hoping he can create a marketplace of investors in India that can address a growing need for intelligent capital. “A person with surplus liquid capital of Rs50 lakh or a net worth of at least Rs10 crore and a high degree of passion for entrepreneurship is a potential angel investor,” said Singhal, a former executive at Motorola and digital software maker Ittiam systems. His venture will connect startups while also train high net-worth individuals (HNIs) in the intricacies of angel investing.

Savvy investors are of the view that those entering this space must build up a portfolio of at least 10 investments before they can hope to expect a return. Moreover going solo is a surefire way to lose money particularly in the early days.

“It’s (angel investing) a team sport, only to be played with seasoned hunters,” said Sharad Sharma, co-founder of software product think-tank, iSpirt who lost all his money when he first began as an angel investor in 2004.

“All four startups went down-under. I learnt the lesson,” said the former chief of Yahoo’s research division in India who has since built up a portfolio of 22 startups including security software maker Druva. Sharma said he invests only when a specialist has put his money on the table and never exits early.

“It’s a problem of more nurses and very little number of surgeons in a hospital,” said Sharma who believes there is need for more investors with knowledge of specific domains who can lead the generalists. Typically a deal anchor has to invest about 20% of the capital, before it is presented to other members in an angel network.

India’s largest angel network, Indian Angel Network (IAN), advises investors to follow a simple rule. “Never acquire a majority stake in a startup or a very thin slice,” said Padmaja Ruparel president of IAN. Instead angels are encouraged to pick up between a tenth or a little over a quarter of the holding in a young company. What’s equally important is to make sure that only a small portion of an angel’s portfolio is allocated to startup investing.

“Angel investing is not meant for those having cash surplus only for a short period of 3-4 years or are planning to meet expenses of a key event such as a child’s education or marriage,” said Sunil Goyal, co-founder of YourNest Angel Fund. Goyal has invested in companies such as ZipDial, Hoopos, Hotelogix and Taxspanner.

For many interested in joining this wave, regulatory opacity is also a deterrent. Technically, venture capital has become a new investment class after market regulator Sebi allowed Alternative Investment Funds, last year, to raise funds for pooled investments meant for start-ups. In many cases angels complain that India’s tax authorities count invested capital as ‘revenues’ and tax the startup. “Angel investors invest in start-ups from their tax-paid income. It is pertinent that the government allows individuals to re-invest their capital gains in start-ups or venture capital funds with full tax exemption,” adds Goyal, who is also a certified financial analyst.

“A startup will give more bad than good news during first two years of its existence. It’s not a game for the faint hearted. A bad angel investor will potentially kill a good start-up,” said Lets Venture’s Singhal.