Earlier this year, the Indian Angel Network, or IAN, announced it was looking to build a corpus of Rs. 350 crore. The idea was to invest Rs. 50 lakh to Rs. 30 crore in companies that are somewhere in-between raising seed capital and a series-A funding round. In an interview with The Smart CEO, IAN president Padmaja Ruparel spoke about the most important element for her in a potential investee company, IAN taking the co-investment route for this fund, and, we had to include, the learnings from Stayzilla saga. Edited excerpts.
Why the Rs. 350 crore fund now?
When IAN started 10 years ago, it was difficult for start-ups to get even the first $500,000 in investment. Angel networks and high networth individuals investing in startups have changed this now. The pain point that we are seeing today is that getting the next $4-5 million is extremely hard. We have seen some very good companies going off the cliff because of this. We will make investments of Rs. 6-30 crore in such companies.
Broadly speaking, we plan make investments in three buckets. Bucket 1 comprises companies raising up to Rs. 6 crore from some of the 450 angel investors in our network. The way we work is that the IAN fund will take 20% of the deal. So, if the total investment is Rs. 3 crore, say, then IAN will invest Rs. 60 lakh and Rs. 2.4 crore will come from the angels. We have a portfolio of over 160 companies across 17 sectors in this bucket.
Bucket 2 is companies from Bucket 1 which perform and grow well. They can raise Rs. 6-30 crore. We already know these companies and their promoters, so the process for getting the funding is faster. In some cases, it’s a matter of going from one room within the IAN [office] to another room.
Bucket 3 is the “best of the rest”. These companies are again looking for Rs. 6-30 crore, but aren’t in the IAN portfolio yet. They could raise money through this fund alone or through a co-investment. By the time we get to Bucket 3, the number of [investee] companies comes down to 10-12.
We have closed the first round with Rs. 175 crore for this fund. All of it has been raised domestically, from both institutional and individual investors.
When IAN started 10 years ago, it was difficult for start-ups to get even the first $500,000 in investment. The pain point that we are seeing today is that getting the next $4-5 million is extremely hard.
A typical fund invests in 20-25 companies in its life. We plan to fund 160 companies over a four-year period through this fund. For some of them, we might go at it alone. While for others we will co-invest with venture capital firms and strategic investors. It’s a triple-win because one, the startup can quickly get the funding it needs. A good company might raise up to Rs. 30 crore from the IAN fund and an additional Rs. 20 crore from the co-investors. That is a total of up to Rs. 50 crore.
For third-party investors, it is a quality deal because their risk is hedged. Also the IAN ecosystem is both a huge marketplace and has a pool of mentors who are themselves CEOs and founders of successful conglomerates. The entrepreneurs can tap these resources.
As for IAN, co-investing can hedge IAN’s risk, get the endorsement of the third-party investors as well and help companies raise the next round of moneys quickly.
What are some of the key challenges of co-investment?
Getting all the stakeholders to arrive at one decision, whatever that decision may be, is difficult.
Have you finalised any investments through the new fund?
We have made some decisions, yes.
Any that you can share at this time?
These things take their own time. We’ll announce them when the companies are ready.
What is the one thing that absolutely has to work for you before you invest in a company?
My biggest need is a kickass team. Seventy per-cent of the time I spend with entrepreneurs goes in assessing whether they are a leader, whether they’re good salespeople, is this life and death for them. As the cliché goes, I would much rather bet on a class A Team with a class B idea than a class B team with a class A idea.
There are some learnings for the startup ecosystem here. I don’t say this in relation to Stayzilla alone, but for the ecosystem at large. Companies need to have greater transparency, not less, when they are not doing well. Communication has to go up 100 times.
An early investor in the Stayzilla homestay app, the IAN was one of the players in the startup ecosystem to come out in support of co-founder Yogendra Vasupal [Yogi] after he was arrested on 14 May. Are there any learnings you think startups should take away from what happened?
Yogi and Sachit [Singhi] are great entrepreneurs. What happened is unfortunate. The company made a market share, land grab play that didn’t work, though it was a very good idea at the time. I believe strongly that they will make a comeback, and with a bang.
I have a clinical and philosophical take on this.
From an investor point of view, when you enter into a company is important. But even more important is when you exit it. We were probably lucky to have exited to some extent when we did. The investment game isn’t about staying married, as much as you may want to help. And I had my full support behind Yogi.
There are some learnings for the startup ecosystem here. I don’t say this in relation to Stayzilla alone, but for the ecosystem at large. Companies need to have greater transparency, not less, when they are not doing well. Communication has to go up 100 times. They need to have regular conversations with their employees, vendors, investors and mentors.
Companies need to set priorities for what needs to be done in bad times. What is the order in which payments go out, set something aside for regulatory impact, payments, etc. I don’t mean to be pontific about it, but companies need to talk about how to fail. There needs to be an ecosystem to help the employees of failed companies find other suitable work. IAN is working on building such an ecosystem.