In this edition of The Interview, Fair Observer talks to Raghav Kanoria, a co-founder and co-president of the Calcutta Angels Network.
India is emerging as an entrepreneurial haven. The Economic Survey 2014-15 placed India as the fourth biggest startup hub in the world. According to the report, this dynamic environment is spurred by the growth in technology-based areas such as research and development (R&D) and business process management.
While there is much to be done to create an entrepreneurial environment similar to that of Silicon Valley’s, India is moving in the right direction. According to the Startup Genome’s report in 2012, Bangalore was ranked as the 19th best startup ecosystem in the world.
Support is rising from many areas as Indian Finance Minister Arun Jaitley has promised increased investment into technology startups by creating the Self Employment and Talent Utilization mechanism; this will serve as an incubator and advisor program for entrepreneurs. The Economic Times has recently announced the first startup awards to honor India’s finest entrepreneurs. With Flipkart, OlaCabs, Snapdeal and a few others reaching unicorn status—startups valued at $1 billion or more—it is apparent that India is cultivating a new generation of talented entrepreneurs.
However, the flurry of startups brings forth the importance of the angel investors (angels). Not to be confused with venture capitalists (VC), angels provide early stage investment, advice, network and expertise that are crucial to a startup’s survival. Investing at this stage of the startup involves a lot of risk as highlighted by a Forbes India article, as “only about one-fourth of the angel-backed companies end up reaching [series A funding].” Even with all the risks, the abovementioned article finds that the number of angel deals increased from six in 2006 to 200 in 2014.
In this edition of The Interview, Fair Observer talks to Raghav Kanoria, a co-founder and co-president of Calcutta Angels Network, on the outlook for angel investing in India.
Daniel Currie: With the level of entrepreneurship rising in India, there must be a flurry of startups looking for capital from angel investors, especially in the early stages. Other than money, what do entrepreneurs look for when searching for angels?
Raghav Kanoria: Angels typically take board seats depending on the number of seats available, while those with a larger stake in the firm get board seats. Recently, investors have taken on different roles such as board observers and committee members, depending on the structure of the mentorship panel. Nonetheless, investors look to advise companies on growth and funding strategies for the next stage in the startup.
Entrepreneurs scan for specific attributes of an angel investor; if the startup is placed in the technology sector, then entrepreneurs will look at the angel’s expertise. In addition to the money, entrepreneurs want to tap into the angel’s network and value-added skills.
Currie: What do angels look for when making investments in startups and firms?
Kanoria: Angel investors search for a good team that has relevant experience in the sector of their startup. There should be a large market opportunity, and the startup must possess the scalability to take advantage of the potential.
Investors take care to evaluate exit opportunities as they need to make a financial return on their investment.
Currie: According to a working research paper by G. Sabarinathan, “A large number of angels have come into existence over the past decade.” Do you have suggestions on how to continue this trend?
Kanoria: Firstly, people need to realize that angel investing is different from investing in firms in the stock market. Angels have to guide and help entrepreneurs through the process of building a company, rather than just providing them with capital. Normally, the entrepreneur does not have the relevant experience in tax, finance and building a team—which is how angels need to add value.
The [Indian] government has been trying to spur the level of angels by creating a panel—that features people from relevant industries—to formulate policies that benefit entrepreneurs and investors. The increase in investment on technology parks and business incubators will provide the necessary mentorship to help startups. While there are proposed talks on introducing tax breaks for angel investments, there has not been any implementation of such measures.
Currie: What is the usual duration for angels before exiting the startup? Has this investment horizon increased or decreased over time, and is this a positive development?
Kanoria: It takes three to five years, on average, for angel investors to exit because the startup goes through multiple rounds of fundraising. Angels normally exit when the VC buys the stake from the investors.
The investment horizon has decreased from four to six years to three to five years because of the increasing number of VCs that are looking to buy out the stake of the angel investor.
Currie: With the decline in the initial public offering [IPO] sentiment this year, what are the best exit strategies for investors at this time?
Kanoria: The best exit strategy for angels is to raise money from another financial investor because they know how to raise the equity value of the company over time. Strategic investors are good for mergers and acquisitions as they want to acquire startups that fit into their business philosophy.
The least preferred option for an exit strategy is through an IPO. Public markets do not pay attention to young companies that lack the track record of generating profits; this is the case for a lot of startups.
Currie: As entrepreneurial zeal continues to grow in India, do you expect a rise in “unicorns” in the near future?
Kanoria: There are a number of sectors that will provide immense valuations in the future. The online food business, which includes ordering, listing, as well as buying groceries, will take off now. Quick service restaurants are forecast to do particularly well in the future. In essence, any retail segment is poised to garner great valuations.
The increasing demand for mobile phone transactions will also spur startups as more Indians have mobile phones than computers or laptops. A lot of cloud-based companies are likely to come forth due to increased demand for cloud based businesses.
The consumer internet market is slated to take off, and the rise of Info Edge is a testament to this trend. The company has specific verticals that they can take forward to expand.
I expect the abovementioned sectors to generate billion-dollar valuations in the future. India is at the tip of the iceberg, because the country has a lot to do to create a startup environment that matches the US entrepreneurial culture. Once the correct environment is fostered, then there will be a rise in the number of Indian-based “unicorns.”
Currie: What specifics do you look for when investing in a firm? Is there a particular financial metric that usually guides how you invest, or do you look for the management expertise or team-based factors?
Kanoria: Financials are not a main concern at the startup stage because it is too early for these firms to generate strong financial statements. The financial model comes at the venture capital stage.
My main concern is the size of the market opportunity, and how the startup team is working to meet it. A crucial metric I look for is the increasing number of users—of the product or service—over a monthly basis; this is similar to the customer acquisition rate over a period of time.
Currie: When choosing a portfolio today, do you look for diversification across sectors, or do you diversify among different firms in one or two burgeoning sectors?
Kanoria: It is always good to diversify across numerous sectors because you never know which team is going to do well from a particular sector. It is a dynamic economic environment, and it is likely that teams in specific sectors will not be able to generate the necessary profits for the angel to attain a return on his/her investment. It is always prudent to diversify across sectors.
Currie: According to a Forbes India article, investors look for scalability and large market share. These investors also note the importance of low capital expenditure required for further expansion, which may create a playing field fit for technology-based firms. How do other firms in different sectors compete to attain money from investors? Are we seeing technology pervade through every sector?
Kanoria: Everything that is technology-enabled is highly scalable as the firm only needs to setup a product, work on R&D and attain sales. There is no need for immense incremental investment once you attain sales for the technology-based product.
There is a regular need for capital expenditure investment for non-technology businesses. Another deterring factor is the level of risk associated with a firm that is not technology-enabled.
Investors prefer technology-based firms because of the level of scalability involved. If a company attains more consumers with a low level of initial capital—and in a short period of time—then it will be a worthy investment for the angel.
These statements reflect the author’s personal opinions, and they do not reflect the company’s interests
The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.
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