With the R and D words (recession and depression, for the uninitiated) being bandied about as frequently as we pick up calls on our mobile phones, one wonders what is happening to all sorts of new projects and business ideas in these times. The stock prices of nearly all companies appear to be in a free-fall and all sorts of large projects are being delayed, deferred or just chucked into the bin. The list of companies that have retrenched employees reads like a who’s who and the economic cycle appears to have come full circle with ‘consumption’ and ‘investment’ being relegated to the back benches and ‘saving’ becoming the household buzzword.
In this kind of external economic environment, I visited the TechFest at IIT Bombay a couple of weeks ago and spent time with excited student groups, comprising the electric milieu, showcasing new ways to conserve energy or use renewable energy. My self-interest in this visit, I must admit, was to uncover some great ideas that could be funded by our angel group and take them to their logical conclusion, commercialization.
At the same time there was another event going in in Bangalore which showcased various entrepreneurs and their pet projects and nascent businesses and had a multitude of venture capitalists and angel investors keen to participate in these businesses. It is true that those days when angel investors were trigger happy are gone and as with all investor groups, they have become more discerning. And rightly so. This led me to think about why there is still so much angel investing activity when traditional public markets and venture capitalists are mostly inactive. Here are my ten reasons on why the slow down has not had a telling impact on angel investing with is set to grow from strength to strength:
1. Innovation Continues: Good startup business plans and innovations are still around and need to be funded. Innovations are not dependent on which stage of the economic cycle the world is in.
2. Entrepreneurial Surge: Salary hikes and mouth-watering bonuses are no longer the proverbial carrot at the end of the stick in corporate jobs. Therefore, the exit barriers for career seekers in such jobs is low right now. People with an entrepreneurial bent of mind are more likely to say, “Let me take the plunge now and do something on my own given dwindling growth prospects within corporate confines.”
3. Leverage Independent: Angel investors are not dependent on leverage for their investment, unlike private equity and venture capital investors. Hence the liquidity that got sucked out of the financial system over the last few quarters does not impact angel investments.
4. Eager Startups: The focus of the entrepreneur today is to get off the ground and be ready for the good times when the cycle turns. Hence they will be more eager and accommodating, which angels, or any investor, loves.
5. Attractive Valuations: In these tumultuous times, the balance of power during valuation negotiations is more likely in favour of investors. I know entrepreneurs don’t like this but, cést la vie.
6. Focus on Quality: Angels are becoming choosier than usual but that is not to say thy will invest less. The same money will probably be invested but across fewer deals, in better quality companies.
7. Venture Spill-over: Venture capitalists will rely more on angel investors and, in fact, divert smaller businesses and startups to angel investors rather than get involved themselves. Risk aversion has gone up and they would rather see rolled out businesses rather than business ideas on a power-point presentation.
8. Real Estate’s Loss, Startup’s Gain: The lack of other investment avenues, such as real estate, art and stock markets, bodes well for startups. Angels will be able to allocate more funds to the startup universe. Such times play a role in arousing the interest of high net worth individuals and nudges them into becoming angels.
9. Follow-on Funding: As other sources of capital dry up, follow-on investments by angels will increase. Angels are best positioned to increase their exposure to existing investee companies as they understand the business, have an ongoing relationship with the entrepreneur and view these companies as less risky than new investments.
10. Bedrock of Entrepreneurship: The biggest incentive to continue angel investing is to build a sustainable and long-term entrepreneurial eco-system. In a developed investment eco-system, angels form the lowest sub-strata that nurses small companies given birth to by entrepreneurs. On the shoulders of angel stand venture capitalists, private equity firms and public markets.
I am sure there are plenty more reasons for angel investing not to slow down. There will also be naysayers who have their own reasons on why angel investing will be as impacted as other forms of investing. I’d be delighted to hear from you no matter which side of the fence you’re on. Happy investing!
About the columnist: Rajesh Sehgal is senior executive director with the Emerging Markets Group of Franklin Templeton Investments and an angel investor with Mumbai Angels.
Author Disclaimer: The views expressed here are mine and not those of my employer
Photo Courtesy: Rajesh Sehgal
Largely agree with the viewpoint. But a few random thoughts.
Firstly, not fully convinced as to when ” Cash is King” is the mantra which everybody is talking about, why would an angel investor take a plunge into a business or a venture at this stage of the economic cycle.
Secondly, From an enterpreneurs point of view, if the idea is robust enough, then it is the right time to start putting bricks in order as the asset values are low(especially real estate) so that his total capital investment is contained. This wil surely help him lower his breakeven when the cycle turns up again.
Thirdly as rightly said, there is no recession as far as ideas are concerned. Indians especially have very innovative mind.
Finally also agree with the point that currently when banks/financial institutions are very choosy about when and where to lend, angel investors can play a very active role in funding such startup venture.
It would be nice to put in some kind of statistics which shows, how may people actually submitted their ideas to mumbai angels and what % of that finally got funding. Also the time period for getting such funding would be an interesting statistics.
Its good that there are angel investor who are keen in investing in new technology and fund young entrepreneurs. But in last four years how many angel investors have initiated in new technology and concept. Whether it is angel, VC or PE in majority of the cases there investment are in such company which were doing well, such was the craze for PE,VC and angel investor that instead of going to banks for loans entrepreneurs use to scout for PE,VC and angel investors. In today’s environment they are unable to get PE< VC or angel investor nor any loan from banks .And this are the company which invested money for expansion beyond there existing capacity and have been badly hit because of which value of investor have been eroded by more than 40%. Back to the topic, I have been moving around in different states in India and specially in villages and tier II and III cities I had to ask myself , is there any impact of recession on them? the answer is no. I have seen people using instruments made by themselves and being used in farms , small factories in a very cost efficient way which u can’t see in existing SME . In my opinion if there are people who a serious of doing angel investment they should visit the villages and small cities and fund them and be part of the team to help and teach them how to market there product and look at there financials. The returns will be exponential within few months rather than in years, but the biggest problem is valuation because we understand the concept but do the people in this cities know the answer is no. But if u put the valuation concept aside and invest the money, the growth and returns will flow exponentially that’s how company like Vadilal, Amul, Lijat papad, Chitale Dairy etc. are still growing without any impact of recession.
A very well thought out article. I Agree angel investors interest would not slow down nor the opportunities.
However, since the level of due diligence would increase substantially the turnaround time would be much longer. Entrepreneurs will also have to make a much stronger business case.
There is surely lot of money to make through angel investing-infact much more now with value investing being avaialble. Is there any door/any investment vehicle for investors with a smaller kitty. Anyone out there who knows please respond.
An interesting “read” I more often than not feel that there are many “Innovative” ideas out there, but commercialization aspects are overstated, and many promising ideas are unable to achieve critical mass immediately, which make investors doubtful of such ideas, of course its not for charity, but I feel differently on this.
Another reason is also because I was in Vientaine, Laos PDR looking at a SOCIAL ENTERPRISE, trying to get funding, a fabulous idea, looking at providing renewable energy solutions to the villages of Laos, investors too evinced interest in the biz plan but that was just it…. my contention is be it any investment, innovative ideas have always been there, many a times returns too are gaugeable but HOW MUCH RETURNS investor will look for will always be the grey spot, irrespective of business cycles.
Real matter of focus is not whether angel investment will thrive, but whether 3-4 years later all investments will become angel. Pl consider a 3-4 year scenario where none of current investors have had much profits or cash in exits. Side by side, control becomes a key item of agenda for investees rather than grand growth. Would appreciate bit of thought there. All the best.
In view of lack of alternative investment opportunities and conviction of investors in prowess of Indian technical workforce and entrepreneurial abilities of small & medium businesses the Angel Investing will not slow down in India as such. Moreover though India is not completely insulated from Global recession but it has seen lesser impact as compared to other economies of USA and Europe which shall also motivate Angel investors to invest in promising ventures.
I feel that even though the ideas for angel investing will definitely keep originating in India in large numbers, the negative sentiments as also the liquidity crunch of investors (due to money struck elsewhere/ other investee companies) will be a huge spoilsport and this may impact angel investing significantly in India also. It may take some time to actually come back to a situation, where the angel investors are more comfortable in terms of improved market conditions, liquidity and risk taking.
Excellent & Interesting Article. Given my relative lack of knowledge about the Angel Investment World, had a couple of queries / comments
1.Entrepreneurial Surge:
Wouldn’t the opposite be more likely in today’s environment (but I reckon you already made the point ‘entrepreneurial bent of mind’) i.e. at least I have a job, if I start something on my own and it doesn’t work (not being pessimistic but you evaluate every option when you do something), it would be difficult to find a job as the one I left whereas when things are going great it is comparatively easier to take the plunge, banks lend easily and even if things don’t work out, I can always find a job
2. Leverage Independent:
Even though Angels are not dependent on leverage, wouldn’t they be as affected by the market meltdowns i.e. stock and real estate, as they would surely have invested in various asset classes to diversify risk and when these assets have gone south, would there be an appetite or cash flow to invest in start-ups with no track record
3. Focus on Quality:
If the same money is invested in fewer deals, isn’t the risk more for the angels?
4. What is the percentage of start-up presentations to Actual investment by angels and what is the period of investment usually?
India is vibrant,with inflation out of the way the govt is going to be pro growth.Superb time to invest as the long term story is intact and perhaps one of the better Global opportunities.We can look forward to a vibrant summer after this winter chill is over so I am sure it is
a great time for the Angels !
IMHO, the biggest reason angel investing will continue at its pace is because most angel investors are first gen investors, and they are not necessarily experienced about perils of angel investing in a down market
best luck!
Private Angels investing in start-ups are complemented by government Angels. And there is no let down of investment by government bodies. TePP provided pre-seed capital as grants to about 25 start-ups till now and we look forward to support more in the coming year. Of course , we do not support dot.com start-ups.