Contributed by: Deepak Mundra, CFA
With rise of unicorns like Flipkart, Snapdeal etc, start-up ecosystems has dramatically evolved in India over last two decades. Success of many start-up companies, enormous opportunities available for various entities to flourish, government focus with “Start-up India, Stand-up India” scheme and many other factors has generated a lot of interest all around. Even with evolved ecosystem and proven successes of many start-ups, initial funding avenues for start-up companies remain scarce. Angel investors are one of the initial investors who fund entrepreneurs to pursue their goals. Angel investors put in their money at a time when no one is really interested in the idea and most of the times; founders don’t have anything other than the idea. Thus, angel investors take a huge risk, much before any other investors are willing, by investing in these companies. Hence, it is no surprise that most of the angel investors are ultra-rich or high net worth individuals who are willing to accept the risk of permanent loss of capital. But, is it really the game open only to Richie-rich of the town?
To answer these questions, Indian Association of Investment Professionals (IAIP) invited Gautam Sinha, CEO & Co-founder of CBREX & Abhijeet Bhandari Co-founder of GREX for an interactive session on March 19, 2016 in Delhi on Angel Investing. Gautam is co-founder of CBREX, a technology startup in B2B space. He started his entrepreneurial journey in 1996 and has invested in many companies since then. Abhijit is the co-founder of GREX and heads market development activities. He has more than 8 years of association with venture capital industry and has helped companies raise capital and build win-win partnerships.
Gautam and Abhijeet (the “Speakers), in an interactive session explained how a lay many, with little extra savings with an ability to take additional risk, can participate as angel investors to generate high return on capital in an exponentially growing start-up ecosystem. The Speakers presented a comparative study of return generated by various asset classes in which they showed that angel investing generates the highest return (also carries the highest risk) among these classes.
According to Gautam and Abhijeet, this time is ripe to invest in the start-up companies in India. With the reach of Internet growing to each and every household in India and advancement in technology, future is going to be much more dependent on the technology. The Speakers mentioned that rise of technology coupled with favourable demographics, government push and quality of entrepreneurs in the Indian start-up ecosystems makes a compelling argument for angel investing in India. They suggested to audience that they should think about participating in this growing and high return generating field to generate high return on additional available income (after all expenses, necessary investments etc. and one should start only with 10-15% of his/her investment portfolio).
The Speakers suggested following checks/do’s and dont’s for first time investors:
- Understand business and its management
- Study scalability and growth potential of the business
- Conduct a proper due diligence and monitor performance
- Understand how valuation is determined
- Understand what will be your commitment as compared to total commitment
- What will be lock-in time and ways to exit
Typical questions and areas to be covered during due diligence:
- Product Service: Why will people use your product/service? How will you make money?
- Market: How big is your market? Who’s is your competition? Distribution? Have you talked to customers? Product-market fit?
- Team: How did the founders meet? Who is fully on (and not on) your team?
- Risks: What are the risks in the business? Can they be mitigated?
- Funding & Use
The Speakers completed the session with an advice that angel investing is way to build wealth but one should start slow, build a portfolio (invest in at least 7 companies), do proper homework, set minimum allocation and a percentage of investible surplus aside. Do not invest unless you really understand the business and trust people who are running the business.
Gautam and Abhijeet answered all questions of audience with patience during and after the session and thanked all for their enthusiastic participation.