Excerpts from talk by Ajeet Khurana, Angel Investor for 22 startups and CEO at IIT Bombay’s SINE. He was a speaker at GBG Mumbai’s session about Angel Funding on Jan 24th.
Glossary: AF=angel funding, VC= venture capital, PE=private equity (two meanings see link), MVP=minimum viable product
There is no exact definition of Angel Funding, it could be money raised by an entrepreneur through one of the means – family, friends, co-founders, etc., or through an institutional way such as an investor who provides capital in exchange for a percentage of equity / share ownership.
Beside the 3 famous Fs – Friends, Family and Fools, there’s a 4th F – Father-in-law!
AF is risky for the investor, earlier one enters a venture and invests, the more likely it is for a startup to die. This is because, after MVP, they may have no traction, unable to meet projected growth figures, fail to get paying customers, difficulty in scaling up, churn in team, etc.,
Due to this trend of ‘Infant mortality’ among early stage startups, An angel investor asks for higher rate of equity to compensate or set-off losses caused by other angel investments they made.
A typical VC expects upto 36% returns, an Angel expects similar or more returns.
Generally, people only focus on wins and windfall gains, they tend to ignore returns and failures, this leads to some amount of skepticism.
An Angel can afford to lose money. That is because they invest only a small percentage of their wealth; In many cases, they can completely lose their principal.
Getting investments kills the business at times. Its not like bank loan which is recovers principal+interest; PE (& AF, VC) needs exponential growth on the capital itself. An illustration Ajeet gave for this was “imagine getting on a cab and instructing the driver to hit the top speed and hold it there and at no circumstances the cab driver is supposed to hit the brakes or slow down. What the the chances that the cab will reach its destination? What are the odds that the cab gets to freeway miraculously and is able to hold the top speed? Think of companies like Flipkart to have been the ‘luck cab’ that hit the freeway and drive on top speed all along”
AF jobs is to see dramatic growth. If they see it then they will be keen to invest, many a times, they will seek a startup and offer to invest if they see such exponential growth (refer drawing below)
Investors bother about revenues, not profits. Grow on the capital. e.g – Flipkart was 1bn one year ago, now they made it 11X.
Borrow model. Revenue share. Equity traded.
If there are such high expectation, then Why are entrepreneurs seeking it? the logic is simple, As long as they can show growth, they will continue to get money.
Entrepreneurs who can show high growth can avail infinite amount of money/funding from investors. (in a humorous example he says – As long you can keep the dance going, i can pump in more money)
Many investors choose to become an Angel and use the fire in belly of an entrepreneur to get returns on their capital.
Entrepreneurship is a disease one never gets cured of!. Maybe if you had bad experiences with investing in stock market couple of time, one may give up, but a failed startup only leads to starting another. The symptoms starts showing up soon enough.
The different stages of PE investing & Objectives of investors therein.
Note: not all startups follow the exact flow, there are high mortality rates between every stage.
- Seed investments: The fund to get started with, convert an idea into MVP. typical money given is Rs. 5-25 lacs. In exchange of this, 5-12% is taken by seed guy. This is a LOT of percentage to give away.
- Angel funding: 6-18 months later after MVP is ready. Now the startup needs Angel funding. Typical amount is Rs. 30-150 lacs. 10-20% of equity is given away. Now it’s far less risky for the investor.
- VC Funding: Growth focused fund. Not all seed and AF companies go to VC stage. 12-30 months after angel funding, a startup is set for VC funding with a business model in place. typically Rs. 6-40crs is invested for 10-30% of equity.
- PE, List, Merger: After achieving a high growth, a venture can opt to complete merger, get listed on stock market and go public or sell it off for a private equity deal by institutions. (e.g Flipkart is still at VC and not gone to PE). Typically a PE acquisition happens at 90% equity.
The Role of an Angel Investor.
- AF advice could be a nuisance for the entrepreneur at times. An investor must help by providing key referrals that will aid in business growth.
- An investor must not in interfere in running things.
- Angels and investors have a say over valuation and capital. These are very rigid.
Some thoughts before getting investment.
- Any form of PE is a slippery slope. No stopping. Or altering the plan or path. Be mindful if you really want investments that comes with taunting investors.
- Its good for entrepreneurs to know & understand the nuances of investment and valuation. A recommended book is ‘Damodaran on Valuation’
- For early stage startups. the valuation is a mere negotiated value. Opinion of the investor decides the value.
- Startup in the space of SMAC gets more funding because growth is high here (refer drawing above). As opposed to, say a solar energy producing company or a hospital. They start at PE level directly.
- If any startup beside the SMAC can prove that they have exponential growth, then investments come by easily.
A few notable quotes:
“A risk for an Angel is losing money when the venture tanks, a worst nightmare for an Angel is when the venture does good yet they dont make money.”
“Its a lie when Investors say they invest on teams”. Team matters since thats the only thing that stays constant.”
“I reject proposals based on subject on emails.”
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Check out more pictures from the event here
Check out a what a venture capitalist has to say about VC Funding
