This year has been, one of those tough ones, wherein, big unicorns had to see the ugly side of funding winter, as investors have shown the tendency to gradually become more and more selective about late rounds of funding. However, this slowdown hasn’t clipped the wings of the ‘angels’ of the industry, at least not yet!
According to a report compiled by venture debt firm InnoVen Capital, deal activity by the angel groups grew significantly in FY16, amounting to Rs.1137 million in commitments across 69 deals, as compared to Rs.703 million across 47 companies last year.
The rise in angel funds has helped younger startups score angel and seed round of funds this year. “Since the angels combine very strong deal-filtering process and high return potential, the environment continues to remain attractive for these investors. Inspite of the slowdown in the later stage VC investing, the continued strength in seed/angel investing has augured well for the newer startups,” Sivaramakrishnan , Director of Finance at Venture Factory said.
Why angel funding has taken a high!
“In 2016 the euphoria has come crashing down. Valuations of giants like Flipkart or Snapdeal have been marked down multiple times. However, the fundamentals of internet or mobile growth and long term potential of India has not changed. What has changed is, the founders expectations of unrealistic valuations. This has opened up a lot of startups investment opportunities at realistic valuations to the angels and seed funds. This has lead of lot of angels and seed funds - even from abroad - becoming more active in India,” Anil Chhikara ,Principal, Jaarvis Accelerator.
According to Tracxn data, the first half of this year saw a total of 127 angel rounds and 246 seed rounds. On the contrary, there have been 29 Series B rounds and 17 Series C rounds.
Mohan Kumar, Partner at Norwest Venture Partners feels that there are multiple reasons that have brought more angel investors to the forefront.“Family office, HNI's have realised that startup, as an alternate asset class, is a real opportunity, hence, are willing to take more risks. Emergence of online syndicate platforms like LetsVenture have made it easier to discover startups and syndicate with marquee 'Lead Angels'. Lead Angels are experienced investors with track record, hence it makes for a new angel to syndicate with them and minimise risks. There have over 2000+ angels and seed funds listed on such platforms.”
He also added that the quality of entrepreneurs has improved, founders have relevant experience and valuations are very realistic.
Similarly Pranav Pai, Founding Partner at 3one4 Capital, also cited various reasons for this trend. “Startup India policy has opened up the space and clarified a lot of items for the startups themselves. This has helped potential angels who were not clear about policy and associated compliances, and well as given a direct stimulus to the early stage. There are also a lot more strategic components lining up in the angel space - more industry veterans who have domain expertise in multiple categories are able to recognize innovations by startups early enough and invest capital and time to help them grow. This applies to newer-generation entrepreneurs who are also very active in the angel space,” he said.
“Early stage investing has gained acceptance as a legitimate asset class – this has attracted a broad based set of investors such as HNIs, successful tech founders, prominent industrial groups and smaller groups of likeminded professionals that are pooling capital at a local level. Angel networks have mushroomed across the country and all major hubs have well organized funds with a substantial amount of capital to deploy. All of this has strengthened the ecosystem for seed funding/ angel funding, and that’s why you are seeing a significant uptick in the deal volumes in this segment,” Rajendra Nalam, Partner, BMR Advisors said.
How has the rise in angel funding helped the ecosystem
The rise in angel funding has also given new wings to young startups, who are in dire need to prove themselves in the industry.
Kris Gopalakrishnan, co-founder of Infosys, recently said that great businesses are formed during the toughest of times. Gopalakrishnan, who is also Chairman at Axilor Ventures, announced that the venture will fund 12-15 startups this year.
3one4 Capital ‘s Pranav Pai said, “There are more sources of capital for early stage companies now, and the best ideas are able to raise capital much faster. The follow-on funding environment has also been growing, but not as rapidly as the angel stage. One might even say that the "crunch" is getting bigger because of the angel funding explosion. So the startups will need to be more disciplined in how they spend their first raise in order to grow sustainably.”
However, industry experts also noted that most of the angel funds that have come recently, are from investors who have recently set their foot in this business. Sid Talwar, Partner at Lightbox said, “Startups are benefitting from a money perspective in the short term. But many “angels" investing are still learning how to invest and so a lot of companies that normally wouldn’t get funded are getting funded which means that the chances of them raising further capital is tough and most times impossible. So medium term, I don’t think it’s a benefit.”