Economic Times | February 28, 2014

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 co-founder 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, cofounder 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, cofounder 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.