Brad Feld has a useful post up on Ask the VC about “How does a small angel investment impact a future VC round?” It probably is one of the most obvious questions to ask when one is going in for angel funding, but often overlooked.
It isn’t easy to raise angel funding in India. Most promising startup business plans languish even before they have started out because of the absence of a robust angel funds pipeline. In the US, angel funding is typically done by successful entrepreneurs, high net worth individuals or in some cases angel funds. The startup ecosystem being so young in India, we haven’t yet seen such sources of funding mature yet. It is happening, but slowly. So, for most startups I have met, angel funding usually comes from family or someone the family knows. Unfortunately, not many people, particularly middle class entrepreneurs, have easy access to even such sources. It helps that investors such as Erasmic Venture Fund, Seedfund and Indian Angel Network have sprung up in the last couple of years, but clearly, we need more.
I’d like to connect this background/environment with an important point that Feld makes: “Your life will be made easier if you treat the angel investment as a real investment and document it legally…” Raising money from family and friends is okay but it is critical to remember that ultimately this is business. And should be treated as such. The earlier we get the right processes in place, the closer we get to setting up a robust and sustainable angel funding eco-system. So, pick your angel with care and don’t forget to sign up for legal counsel.
IMHO, there are many more funds at seed stage.
Hi Abhishek, Thanks for writing. I’m sure there are more. The three names on the post are ‘by example’. Still, there aren’t enough.
Hi Snigdha,
Let me add a financial angle to it to explain why there are few seed-level venture funds. Typically, at the seed/early-stage funding level you require only about $100-500k of funding in India. At such levels the traditional business models for VC funds do not work.
Typical VC model would include small percentage (1-2%) of the total fund size being used for operational expenses and then fixed part (say 10%) of the total portofolio returns being paid to the fund managers and the rest (90%) going to the fund investors. However, if you have 20 early-startups in your portfolio with each raising $250k then, the 2% marked for the operations comes to only $100k i.e. Rs. 40 lacs. That makes it very difficult to enter this market for the institutional investors.
That leaves the field open mostly for angel investors unless, there is a scalable business model just like micro-finance that changes the landscape to address the “bottom of the pyramid” in startup ecosystem.
-Girish
Hi Girish, good to hear from you and thanks for the comments.
[...] Essential read for startups where Kartik Varma takes you along the financial angle of a startup. While on startups, Snigdha Sengupta makes some interesting points about angel funding in India. [...]
Hi Snigdha/Abhishek
I am trying to raise Series A funds for an existing venture in the recruitment space – can you expand on the list of venture firms above to include new names?
Thanks
Ram