Tuesday, May 27, 2008

Where angels don’t fear to tread.

When A Rookie Entrepreneur Is Not Yet Ready For Venture Capital Funding,It Is The Angel Investor Who Gives That Person Wings.

BUSINESS aspirant Madan Pandit quit his job in 2004 and roamed Bangalore’s cyber cafes to build the prototype of an online search analytics tool, which he later converted into his first venture. When he needed funds for the start-up, he didn’t consider venture capital (VC) firms but approached well-known angel investor Kanwaljit Singh. With an unproven technology and hardly a business model to speak of, he still succeeded in getting the funding.

On the other hand, Phaninder Sama, cofounder of Redbus.in, an online bus ticketing site, ran his new business for around three months before making a venture capital pitch. He and his partners skipped the angel step altogether. They, too, got the money. In fact, the new image acquired by the VC connection helped them hire high-class talent.
Two entrepreneurs. Two radically opposite strategies. And both are happy with their respective choices today. So, how does one tell whether a new business should go in for angel investment or venture capital funding? It is indeed a crucial choice for a small company, because if an entrepreneur is not yet ready for venture capital, it is pointless to waste time pitching the business to VCs and more profitable to approach an angel.

Angel investors, often, are successful entrepreneurs themselves, fondly reliving their early struggles and wanting to mentor young minds. Some think of investments in start-ups as a way to give back to society. Others, who left India and made it big in the West, want to shrink the country’s economic growth curve with the stimulus their money would bring to entrepreneurship. Thus, they are driven first by the beauty of new ideas and only then, by return on investment. They can put in as little as a few lakhs of rupees to as much as several crores.

Venture capital funds, on the contrary, are professionally-driven enterprises which pool in resources from their investors and channel them into ideas that are more likely to succeed. They often look for a proven, or at least a well thought-out business model, cash flow, management bandwidth and so on. They also look to invest a sizeable amount of money, say a few million dollars.

“By default, you would always want to go in for VC,” Suvir Sujan, a venture capitalist with Nexus India Capital and a former angel investor, said. “VCs can get you further with capital. With an angel, you could get stuck, because there is only so much funding an angel can provide. After all, he is just one individual. The VC offers the stability of an institution.” However, an angel would be the option when VCs are telling you it is too early to invest in your company, he added.

Venture capital funds can be of immense help in building a company to maturity, after the business has cleared the initial hurdle of getting on the track. In an increasingly globalised world, marketing and hiring the best talent can be expensive and large investments are called for in the growth stage. Angel investors don’t have the financial muscle to shepherd their investee companies beyond a point. So, in reality, the two investors play for stakes in different stages of entrepreneurship, but their roles often overlap. To choose between the two, a thumb rule for an entrepreneur could be the stage at which a start-up finds itself. The earlier the stage, the more inexperienced the entrepreneur, higher is the need for angel investment support. Remember, the angel is likely to take more personal interest in the business than a VC could possibly do.

Madan Pandit recalls how he stumbled on Kanwaljit Singh at a social gathering. Talking to him, Pandit realised the investor was passionate and hungry for ideas such as his own and that he would be willing to bet on a horse that was yet to run a race. They continued to remain in touch after their first meeting. Eventually, Mr Singh took Mr Pandit under his wings. “I didn’t completely understand what he did. All I had was the framework of understanding as to why it would work. I also knew for sure that he had the relevant experience and that he had his sense of direction clear in his mind,” Mr Singh said. Pandit’s offering, which he calls a ‘post-Google solution’, is aimed at enabling analysis of information thrown up in a search so that the results could be used more effectively. This new thought was put on a firmer business footing with the help of Mr Singh’s association.

His business, just an idea at that time, could have been rejected by venture capital funds as too small and unattractive. They might have been discouraged by his lack of experience or doubted the viability of the product.

The community of angel investors is expanding rapidly in India and it is time entrepreneurs benefited from this class of patrons, experts said.

Raising venture capital is often a difficult task even for companies with a proof of concept. For the rookie, it can be a frustrating experience to get rejected repeatedly. Just the fire-inthe-belly won’t light up a VC’s imagination and the funding agency may reject an application on the slightest doubt. After all, VC panelists have to refer back to hard-nosed investment committees for approvals.

On the other hand, angel investors often work on a hunch. “They can take more risks as they are spending their own money. Angels invest in entrepreneurs because they like to do it. So it is okay if the entrepreneur does not have a revenue model,” said The Indus Entrepreneurs-Delhi president Saurabh Srivastava. Processes, balance sheet and market share, the staple diet of venture capitalists, are not so central to an angel investor’s strategy. Bharati Jacob, partner with SeedFund and also a former angel, said she invests in people who have the capacity to build a business, rather than on their revenue models and marketing strategy. “As an angel, I did invest in companies because I trusted the people. I didn’t necessarily know the sector as well.”

There are a number of ways to seek out an angel. The National Entrepreneurial Network’s (NEN) Online Resource presents a list of angel investors in India and simplifies the search process down to three points: 1) Ask everyone you know. This could include friends, family, acquaintances and even ex-bosses. 2) Research, and then cold call. You might find a potential angel from his blog or a news article or maybe someone who has had experience in a related industry. 3) Make use of existing forums: It is easier than ever before to be an entrepreneur in India. There are specific groups like NEN and TiE that have brought together experienced entrepreneurs to mentor and network freshers. These organisations can help hook up a young entrepreneur with potential angels. There are also numerous events conducted by organisations like CII and Ficci.

But each external investment comes at a price. You fork out a chunk of your company to the investor, angel or VC. An entrepreneur must be careful in how much stake he or she is ready to give away. Mohit Dubey of Bhopal learnt it only much later. His idea was to set up a website that would simplify the procedure of buying a car, new or used. His firm, carwale.com, started rolling with Rs 4 lakh given to him by a former boss and mentor, and raised Rs 12 lakh soon after.

Back then, he ended up surrendering a large chunk of his company for the initial investment. In retrospect, he thinks it may have been too much. Nevertheless, he looks at the brighter side and calls it a learning process. “If I were to do it all over again, I would have given out a lot less stake to the investors and consultants. If at all I would give out such a large stake, I would give it on the condition of performance.”

Article Resource:
Author: Jacob Cherian is the Chief Editor in the The Economic Times, Mumbai and the article appeared in one of their successful columns on Entrepreneurship/Start-ups called "Starship Enterprise".

No comments: