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2014-12-29

India needs 10,000 more angel investors to build a thriving startup ecosystem

Opportunity for 10,000 experienced entrepreneurs and senior professionals to become angel investors.

Only a very few aspiring entrepreneurs from among 1000s are able to convert their ideas into a business.  And one of the key reasons for this is the lack of access to capital that is required to start something new.

Out of 1000s of investment-worthy startups, less than 300 are able to get initial capital in India.

The present environment is very conducive for people to think of entrepreneurship as a career option. Entrepreneurship cells, incubation centres in colleges, boot-camps, hackathons, and other forums for entrepreneurship promotion, as well as a vibrant media for startups - all have inspired very few to become entrepreneurs.

Angel investor groups, accelerators, and incubators get over 5,000 applications every year. Nearly 10,000 startups send their profiles to media houses every year. While quite of few of these large numbers may not be serious contenders, there is a significant number of aspiring entrepreneurs with the competence, commitment and concepts that can become strong businesses. And quite a few of these can become profitable investments for angel investors.

Yet, only about 300 or so of these aspirants are able to get initial capital to get started. And mostly those, who require capital between Rs 2 to Rs 5 crore range. That’s the declared ‘sweet spot’ of most angel investor groups and VCs who participate in early-stage deals.

Why are there less than 300 early-stage investments in India?

VCs and Angel investor groups are unable to do smaller deals because their members do not want to write smaller cheques, and the efforts required to review, process and close a Rs 50 lakh deal is as much as it takes to close a Rs 5 crore deal. The largest angel investor network in the country does less than 20 transactions in a year.

The number of startups whose funding requirements are less Rs 50 lakh is significantly higher than the number of startups requiring Rs 2 to Rs 5 crore. In fact, many a businesses can get going with just Rs 25 lakh.

Significantly, If we don’t find a way of funding 1000s of deserving entrepreneurs, we would end up frustrating that segment.

Yes, while it is ideal and perhaps necessary too, for aspiring entrepreneurs to bootstrap for a while to demonstrate commitment as well as test their concepts, it is equally true that most aspiring entrepreneurs are going to require some initial capital to make it possible for them to convert concepts into startups. And some concepts require some initial capital even for POC.

We have less than 25 active individual angel investors (may be 50) in India. These are those individuals who have been entrepreneurs in the past or are VCs, and who understand the nuances of angel investing. They are able to identify and pick up high-potential teams, and guide and mentor them to become successful. And while they are doing a stellar job, among them, they can fund only a handful of startup teams.

How can we provide capital to 1000s of investment-worthy startups requiring less than Rs 50 lakh of initial capital?

We need many more angel investors. Investing in startups can yield good return on capital when you understand the dynamics of this asset class, yet only few individuals have become angel investors in India.

Experienced entrepreneurs, successful businessmen and senior professionals have the ability to invest modest sums in startups. Ideally, they should co-invest small sums in startups.

We need to create the forums to help bring more individuals into the angel-investing arena. We need to invest time to create platforms to educate potential angel investors and guide them about angel investing.

And unless we are able to provide seed-capital to deserving entrepreneurs, we will have 1000s of frustrated individuals, who could have otherwise created large businesses, millions of jobs and overall help the country to prosper.

The writer of this article is Prajakt Raut, Founder, The Hub for Startups. He is an entrepreneur and entrepreneurship evangelist. The views expressed here are personal.

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