How Online Deal-making Platforms are Democratizing Fund Raising for Start-ups?
In a competitive business environment, start-up entrepreneurs focus more on testing their product/market fit, smoothing out business plan and hiring an A+ team to attract investors and spend their precious time scouting around for seeking angel investment. Right from pitching to a chunk of investors to signing the term sheet, the entire screening process often gets haphazard and lengthens the turnaround time to three-six months.
Reorienting Angel Investment
Online dealmaking platforms help start-ups by the way of creating their investment-ready online profiles knowing what accredited investors (listed on these platforms) look at while investing in a start-up, reviewing business plans, closure of term sheet and shareholders agreement, legal and financial due diligence. This drastically cuts the time spent by entrepreneurs on raising funds.
“The top challenge for entrepreneurs I met before starting LetsVenture was raising funds. It was very surprising that there was nothing online in India that could help start-ups raise funds. It took around seven months and meeting around 60 investors for a friend of mine to raise capital. Being a single founder of her company, her business suffered as she had to focus a lot on fund raising,” says Shanti Mohan, Founder and CEO, LetsVenture, started in May 2013.
“We are reengineering the way fund raising process works by cutting down the time it takes to make the deal not just to find an investor. We are not only doing matchmaking, but also dealmaking. Like in dating, after you find someone, you go to the dinner, watch a movie and then figure out the compatibility between you two, finally ending up in marriage,” says Vivek Durai, Founder and CEO of Chennai-based TermSheet.
The ease of raising funds through these platforms is apparent in Anurag Shah’s words. Shah, CEO and Co-founder of Aureus Analytics, a Mumbai-based big data and analytics start-up, raised the largest angel round of $850,000 from multiple investors including Rajan Anandan, Head, Google South East Asia, through LetsVenture in November last year. “It took just 1.5 months to get the term sheet from the time we decided to raise funds through LetsVenture. Although we also considered raising funds through traditional offline angel investors, the transparency we got in terms of the engagement with investors was a lot easier through LetsVenture. Everybody could see us, we could see which investor is trying to study us, we could see where they are investing, etc. The investors who approached us already had information about us. So the amount of negotiation and time involved drastically reduced compared to traditional angel groups where we had to speak to each investor, convey the terms and how it works,” says shah.
Supplementing Investment Growth
Expanding Internet penetration has led to the creation of online platforms arguably for every industry, including dealmaking, as their supplements. Besides that, there are more than 550 angel investors focusing on Indian market with around 13 times growth in total investment since 2010. This rise is driven by Internet-enabled companies and individuals, primarily professionals and top managers of India Inc, having decent amount of wealth and appetite to invest in interesting business ideas.
Online dealmaking platforms offer them the opportunity to efficiently invest in investment-ready start-ups, taking out much of hassles unlike offline angel groups where everything is upon them. It gives them access to a larger number of start-ups. Moreover, it removes the geographical restriction for an overseas investor interested in investing in start-ups listed on these platforms.
“Online platforms give investors the freedom to be time zone and geographically independent. Additionally, they democratise the angel investing process by breaking down barriers like the need for a recommendation to enter an angel network or having prior investing experience. It gives me access to large number of deals as well as allows me to simultaneously engage with multiple start-ups to learn about various sectors,” says Utsav Somani, Lead, Delhi Chapter, LetsVenture. Somani has invested in multiple start-ups, latest being Mumbai-based test preparation start-up Testbook.com in which he led the round worth Rs 1.5 crore in October last year via LetsVenture.
Last year out of 180 investors that invested through LetsVenture, 33 were global investors. “Being online, we got investors from other locations like the US, Singapore and even Delhi which otherwise wouldn’t have been possible,” adds Shah.
While angel and early-stage investments have risen over the past many years (from around 11 deals in 2010 to 114 in 2014) but they are way too low to take the start-up ecosystem to the next level. Prajakt Raut, Co-Founder, Applyifi, says online dealmaking is a necessary route to increase number of start-ups getting funds.
“Unless the current format of offline angel groups is taken online, we will not be able to expand the early-stage ecosystem in India. We need 35,000 angel investors not 350, which India’s largest angel network has. And to do that, we need to provide a forum for senior professionals and emerging entrepreneurs to also co-invest in start-ups. Also, we need to make sure an increase in smaller ticket size deals happening – a number of start-ups need less than Rs 25 lakh to get started. But that cannot happen through offline angel networks as its members want to write larger cheques,” says Raut who will launch a platform (Applyifi) this month. Applyifi will help start-ups create free pitch decks, which several investors and accelerators can view. It will also rate start-ups with a scorecard on key parameters that will help investors select investable start-ups.
While most of the platforms earn revenue through commission basis of two per cent of the total deal size from start-ups, Applyifi is looking to charge Rs 5,000 from start-ups for the scorecard (creating the online pitch deck is free) and Rs 10,000 from angel investors for accessing standardised and curated pitch decks and scorecard of start-ups, but that is subject to change. Currently the platform is in private beta, and is on invitation basis.
A curated set of investors with their profiles, including their portfolio companies and investment thesis, are listed on the online dealmaking platforms after understanding their areas of interest, their genuineness as an investor and helping new investors understand the risks associated with angel investment. They can then view start-ups actively looking for funding and connect with them. They can also lead the investment and participate in an existing round of fund raising.
Online dealmaking start-ups act as facilitators in raising funds, the deals however still gets closed offline through one or two meetings. It is not going to happen or at least not in near future that investments are being raised online. Offline angel groups will not cease to exist nor will completely move online. “Offline networks will co-exist with the online network. It is like you have Facebook but you still go out and meet friends. Offline association is very important for angel investors,” says Mohan.
However, offline groups like Indian Angel Network and Mumbai Angels are actively enhancing their digital presence to attract angel investors showing interest in Indian market. Also, there may be a bit of uneasiness among offline groups for losing a number of deals to angel investors listed online that doesn’t belong to any offline angel group. So, offline groups will have to reduce the turnaround time for closing deals to remain competitive.
Despite the fact that funding closes offline, there can be a possibility of the entire process getting little impersonal for investors. Apoorv Sharma, Executive Vice President, VentureNursery, an angel-backed start-up accelerator, opines that while access to a large number of angel investors through online dealmaking platforms is good, the control on investment process offline is better than online.
“Angel round is primarily on the basis of team assessment not the proposition that start-up make. That assessment can be made through offline angel networks where there is a lot of emphasis on interactions with entrepreneurs unlike online,” says Sharma who invested an undisclosed sum in crowd-funding platform Catapooolt along with Calcutta Angels and other investors listed on ah! Ventures in April last year.
However, Shiju Radhakrishnan, Founder and CEO, iTraveller, a cloud-based travel discovery, planning and booking start-up, doesn’t think so. “If an investor is able to decide to invest in a start-up without having much interaction, it doesn’t mean that his/her decision is incomplete. It is not mandatory to have a personal relation as that anyway happens once investor start working with the founder,” says Radhakrishnan. iTraveller raised Rs 6 crore through ah! Ventures, LetsVenture and Mantra Ventures last month. It also raised Rs 1 crore each from LetsVenture and ah! Ventures and Rs 4 crore in venture capital towards the end of last year.
Going forward, towards the end of this year, these online dealmaking platforms will initiate Series A funding too to help start-ups tide over their ‘Series A crunch’. Also the focus will expand from start-ups in technology to other sectors like solar, pharma, clean energy and healthcare.
“The way angel investment happens in India will be changed in next three-five years and the global Indian will make an impact back on the country,” concludes Mohan.