In India, the firm has emerged as a significant investor over the past couple of years since it set up direct investment operations here in 2006. It has invested over $150 million here so far, which has come primarily from the $650 million eighth fund. “In Canaan VIII, we have committed about $100 million to companies in India,” Alok Mittal, managing director at Canaan Partners India told StartupCentral via email. Last year, the firm invested approximately $40-50 million, including new and follow-on deals. Its largest deal from the year was a $45 million Series A round in Bangalore-based software services outsourcing firm Happiest Minds, alongside Intel Capital. In all, the firm has invested in 13-odd companies including ecommerce startups Naaptol and MotorExchange and microfinance company Equitas Micro Finance India. With respect to Canaan IX, while the firm does not make specific allocations to any geography, investments in India are expected to continue at its current pace here, says Mittal.

Globally, two-thirds of the new fund will be allocated to investments in digital media, consumer Internet, enterprise, mobile and communications companies in the US, India and Israel. One-third is being earmarked for investments in biopharmaceutical, medical devices and healthcare infrastructure companies, said the release.

Compared to most venture capital investors in India, Canaan’s deal run in India has conformed to a slower pace at 2-3 deals per year. In terms of specific sector themes for investment in the current year, the firm is looking at consumer Internet services, ecommerce, software products and offshore services.

A software services outsourcing company is an odd choice for you. How did the deal happen?

The idea of yet another information technology services company appealed to us. We started talking to them a few weeks before the company was set up. We spoke to Ashok (Soota) to understand what he was looking at doing. The founder and senior team is an excellent group and that obviously was a big attraction.

Was a co-investor always on the cards?

Yes, from the beginning. A $45 million cheque is a large cheque to write to a startup at the Series A round.

What do you find interesting about the business model?

The business model draw for us (Canaan) was the outsourcing play. We already have a couple of portfolio companies (iYogi and UnitedLex) in that area. As far as the software services sector is concerned, in the past, significant shifts in information technology spends have created space for new companies. There is a shift taking place now in terms of enterprises in the US and Europe adopting cloud and mobility-based solutions. We think Happiest Minds has the potential to grab a large slice of this market.

Will they work closely with some of your India and global portfolio companies which are in the same area?

Absolutely. In fact, the founders have been very diligent about walking through both our and Intel Capital’s portfolio companies. They’ve picked a dozen that they could partner with. Their core differentiation is going to lie in the solutions that they come up with. Canaan has a number of computers in the cloud computing area. For instance, we have one that is in the area of testing for the cloud. Happiest Minds will look to partner with such companies to create their own solutions.

Ashok Soota has set the company a $100 million revenue target in six years. Do you expect that target to be met given that there’s an economic slowdown looming?

It is always good to put out goal posts. But in an early stage company there is always the element of getting the formula right. The company already has customers. But we’ll take it one step at a time. That said, $100 million is an achievable target. Slowdown don’t really impact startups. Initially, for this company, it will not be about winning $10 million-plus outsourcing contracts, which is where the established players operate. At this stage they will be looking to win very small contracts.

Image Courtesy: Canaan Partners

Canaan Partners

Making Angel Investing Work

By Alok Mittal

Canaan Partners hosted a roundtable discussion with over 30 angel investors. This note summarizes the key discussion items.

Individuals & Groups

The participants included members from angel groups (Indian Angel Network and Mumbai Angels, each of which have made 18 investments till date) as well as individual angel investors. Many participants also reported that they invest both individually and through these groups. Members of the groups pointed out to several advantages of organizing themselves, including:

• • Ensuring adequate capital availability through syndication
• • Sharing the effort involved in making investments as well as managing them
• • Availability of wider domain knowledge within the investing group

Time, Not Just Money

Most participants agreed that angel investments entail high level of involvement and time commitment. While there was consensus that the operating team needs to be given enough operating freedom, investors mentioned a wide range of involvement from finding office space, to recruiting talent, to helping find customers. Some of the investors emphasized on the need to define concrete value-add before making the investment, such as a specific list of customer contacts that could be useful to the company. Some participants reported spending as much as two full days a week with investees.

There was emphasis on defining and working towards milestones that can be achieved with the often meager angel capital. Some of the suggested milestones were towards business progress; others towards ensuring that the next round of financing can be secured.

More Than Just IT

While the earlier stages of angel investing witnessed a bias towards information technology oriented investments, angel investors are now looking at a wide range of sectors. There was a view that sometimes brick-and-mortar businesses have a wider set of potential acquirers. At the same time, many participants pointed out that since angel investee companies need to raise their next round of financing from venture capitalists, the sectors are limited by where follow-on investments are expected to be available.

Profile of Entrepreneurs

Majority of the group indicated a growing preference for entrepreneurs with strong domain expertise and operating background. Both the lack of compelling differentiation in ideas, as well as the difficulty in building strong operating teams under inexperienced entrepreneurs were cited as reasons.

There were differing views on the importance of pedigree of the entrepreneurs. While principally most people agreed that there was a lot more talent than just from top engineering and business schools, there was also a view that entrepreneurs with pedigree stood a better chance of raising follow-on venture capital, hence being better bets for angel investors.

Suggestions for the Development of Angel Capital

There was consensus that there is very little seed stage capital available, and there were several suggestions that could be taken up on a collective basis, and in collaboration with organizations such as TiE:

• • Tax breaks for accredited investors, similar to those prevalent in other countries
• • Devise investment structures that allow for returns even when the investment turns into a lifestyle business, with no acquisition or initial public offering in sight, and with lower dependence on future rounds of financing.
• Expand the themes and geographic spread of angel investment, perhaps by attracting local capital. Case studies of successful angel investments, as well as training on investing and portfolio management could be useful.
• Devise management structures to allow distinct roles for passive investors and active members, to allow maximum leverage to engaged investors.

This is as per numbers collated from deals reported by various media and announced in press releases. Not all these deals are verified and in many cases the announced/ committed money will flow into the respective companies in tranches over an extended period. The actual total investment, therefore, would be much lower.

There are other numbers floating around as well. Venture Intelligence puts investments till November at $332 million across 68 deals, against $839 million and 155 deals for the full year 2008.

Here are our key numbers from 2009:

Investments: $147 million

Deals: 59

Top Dealmaker

This one is a tie. Nexus Venture Partners and Aavishkaar Venture had the most number of deals in 2009, notching six each. It was not possible to select the top dealmaker by quantum of investment because several deals have been done in concert (two or three investors teaming up) and the break-ups are not available. However, to get a sense of who the top venture capital investors in India are at present and where they are investing, read a recent Businessworld story here.

A small note on Aavishkaar: This one is a special kind of investor. It backs startups that address ‘bottom-of-the-pyramid’ opportunities. Many of its portfolio companies address the rural markets and disadvantaged sections of our society. It has three funds, of which Aavishkaar India Micro Venture Capital Fund has made the most investments this year. This fund typically invests between $50,000 and $500,000 per company.

Deals

Singhal is a man on a mission. He wants to set up a platform, under the Canaan umbrella, that will help entrepreneurs to get in touch with angels more effectively. The first step to that is to get a fix on the angel community itself. There are a few organized angel investor networks, such as Mumbai Angels, Indian Angel Network and so on, but clearly, not enough. Singhal thinks that the angel communty is much larger than the already known pool of serial entrepreneurs, big corporate honchos and other high networth individuals. “There are many people in the (corporate) operating environment, at the middle-senior levels who make decent money and wants to invest as angels. They need to be brought into the system,” he says. Most of these folks never get into the system because either they don’t know how to or don’t want to join an angel investor group.

Instead, Singhal thinks, if there is a platform that allows potential angels to interact with entrepreneurs, figure out their needs and eventually do deals, the angel capital pool available to startups would grow exponentially. It would also allow people who have regular corporate jobs to get involved with a startup. As angel investors, apart from investing, they also get to bring some of their operating skills to the table. “Several people I know don’t want to quit their jobs but want to be involved with startups in some way,” he says. And of course, venture capital firms such as Canaan benefit in terms of potential deal flow being created.

I’m not surprised to see this initative come from Canaan. The India team, notably Alok Mittal, Singhal and Harish Gandhi, is among the more active within the venture capitalist community here in terms of their involvement with the startup eco-system. Mittal is a regular grassroots worker — he’s been an entrepreneur with Jobsahead (acquired by Monster) — and spends a lot of time with entrepreneurs formally at forums such as Proto.in and informally. He’s also the driving force behind Venturewoods — probably India’s best startup and venture capital blog.  Canaan also runs the very successful annual TiE Canaan Entrepreneurial Challenge. I’m sure this new initiative will also be a big success. Will be tracking it closely.

Related Posts:

• “India is Ready for More VC-backed EIR Programmes” Alok Mittal
• Missing Links in Business Plans
• Innovation Axis