Angels To The Rescue
Angel investors have also associated themselves with reputed institutions such as IITs to invest in startups incubated in colleges
Everybody wants a piece of Indian startups — global investors, domestic investors, corporate honchos, premier education institutions, government, et al. Look who just gate crashed the great Indian startup party — angel networks in tier-2 and -3 towns. In the last six months, angel networks across tier-2 towns in the country have started operations and have been flooded by business pitches from startups from their respective cities. Kanpur Angels, Chandigarh Angel Network, Native Angels Network in Madurai, Gujarat Angel Investors Network are some of the examples. Members of such networks are wealthy businessmen, belonging to the city, with a thriving business who want to give fillip to young startups in their city. A majority of these angel networks have made their first investment and startups are growing faster with their support. Venture capitalists (VC) based in metros such as Bangalore, Delhi and Mumbai say that it is a recent phenomenon and that funding action in tier-2 and -3 cities is going to gain momentum. Mohandas Pai, chairman of Aarin Capital and one of the most prolific investor in startups, says, “Many big city VCs have not yet started investing in startups in tier-2 and -3 cities because they feel that businesses launched in small towns will not be able to scale up faster or recruit quality talent which will hamper their growth in the long run.”
But some startup founders believe that scaling up and recruiting talent are not related to the location of business, but the business idea. Srikumar Misra, founder and managig director, Milk Mantra, a Bhubneshwar-based dairy product startup, says, “Attracting talent for small town startups is an obvious challenge, but there is a slow shift among professionals who understand the opportunity. There are many people who are looking to shift to smaller cities. Scaling up of a business is an important dimension and may not necessarily be a roadblock due to location.” Milk Mantra, which started in 2009, took 18 months to raise its first round of investment from 22 investors. When the angel investor ecosystem was only emerging in large metros, a few local angels participated in this round and have exited with 3x returns, claims Rashima Misra, executive director, Brand communications, Milk Mantra.
Let’s fast forward to 2015-16 and look at Ashish Bali, Bhuwan Vadhera and Vikram Nijhawan, founders of Jumbo Basket, a Chandigarh-based startup that helps e-commerce companies liquidate products that are returned by customers. The founding team launched the business with their life savings, but to grow it further they needed to raise funds. And that’s where their struggle began. The VCs, seed investors, and incubators who they met told them that since the business was based in a small town, the scope of market was limited, and also, the ecosystem in Chandigarh was not conducive to growth of startups, but if they moved operations to a metro, chances of funding may go up. Bali recalls one such meeting with a prominent VC, “I had an appointment with a VC to present my plan. I waited for 12 hours for the meeting to start, finally he caught up with me while walking out of his office. I made my pitch while walking with him to his car.” Bali was later told that the idea is good, but not in line with the fund’s investment philosophy.
Around the same time, Chan-digarh Angel Network (CAN) had begun taking shape. Finally, Jumbo Basket raised a seed round from CAN last December.
A few hundred kilometers away, Kanpur Angels was getting ready to mentor and fund startups in the city. They too have announced their first funding. Down South in Kochi, Arjun Pillai, co-founder and CEO of Vibeapp, a data intelligence solution for enterprises, raised $4,00,000 from Konglo Ventures and a clutch of investors last April.
These are a few examples from a sea of entrepreneurs who are on a high tide in tier-2 and -3 cities in the country. Vineet Khurana, spokesperson of CAN, says, “Till about five years ago, there were hardly any startups in the region and no funding support or mentors were around to handhold a first-time entrepreneur. This has stunted growth of the ecosystem on the whole. But the good news is that change is happening and its happening fast.”
Cities such as Nagpur, Kochi, Jaipur and Pune are emerging as new startup hubs because of fast growing infrastructure support and increase in young population, which is aspirational about making it big in the startup ecosystem. Presence of premier educational institutions also make it relatively easy to attract and retain talent while keeping the cost of operations low. Rakesh Suri, promoter at Kanpur Angels, says, “We are committed to support startups taking shape in Kanpur. It will not be fair to assume that three or four major cities and metros that are already a hub for startup activity will make India the startup nation it aspires to be. The growth has to come from every city.”
Experts say that with increase in startup activity in tier-2 and -3 cities, there is a good chance of them emerging as retail hubs, driving traction for these business. Early movers in this space will have a head start, if they are able to scale up. So when they go for Series A round, big city VCs would be more open to evaluating their business for investment purpose.
Rajasthan Angel Investment Network (RAIN), which is one of the early movers in this space, started operations in 2012 and has made 10 investments so far. Mahavir Sharma, president, RAIN, says, “There is a need for more such angel investors in small towns. Some business ideas can only succeed in small towns and a metro city-based investor wouldn’t connect with it and may not be inclined to invest in such a company.” To promote startup culture, RAIN gives small amount cheques to entrepreneurs who have a promising business idea, something institutional VCs shy away from. Sharma says, “We encourage startups in the business idea stage to roll out operations and support them with mentoring, hand holding and strategic guidance. The idea is to strengthen the ecosystem on the whole. We are not scared of failure.”
Prime Minister Narendra Modi while announcing Startup India policy in January this year laid emphasis on entrepreneurs emerging from small towns and non-metro cities. But for raising funds or access to better infrastructure and talent, they are forced to move to big cities such as Mumbai, Delhi and Bangalore. Almost all the angel networks in small cities identify lack of funding and mentoring as the biggest pain points for startups in tier-2 cities. They want to plug this gap to stop the migration to metros. Taking a step in this direction, CAN has made pitching and mentoring sessions an integral part of its operations. CAN has tie ups with city-based incubators and organises pitching sessions at regular intervals. Khurana of CAN says, “Earlier, if an entrepreneur was going through a rough phase in the business, he had no mentor to turn to, but that has changed now. We regularly organise mentoring sessions and some of our members are involved in startups under our aegis purely for mentoring purpose.”
Such initiatives may result in discovering successful startups from India; angel investors say it makes business sense too. “Traditionally, investors like us invested in stock markets, gold, real estate, but over the last few years, startups have become a mandatory part of our asset allocation portfolio,” says Suri of Kanpur Angels. Sharma echoes the sentiment, “Investing in startups from small towns make business sense for angels as they operate in small cities. This can result in rationalising their costs, whether infrastructure related or workforce overhead. Thus, a startup with talented founders and a problem-solving business idea operating on a low-cost model offers better returns to angels.”
It is encouraging to see local angels supporting startups right from funding to mentoring to scaling up, while big city VCs shy away saying that visibility becomes an issue for a small town startup and that poses a challenge to scale up. Pai of Aarin Capital believes that at some stage of the business, startups from small towns should shift operations to large metros to stay connected to the ecosystem and to be able to explore better scaling up options and quality talent.
While emergence of such angel networks across the country is a good news, investors say that there are many things that need to be put in place to avoid investing in fly-by-night kind of startups and losing money as that could impact the sentiment in a negative way. While most of them are using external agencies for auditing and financial due diligence, some have gotten into partnerships with bigger networks such as Lets Venture who are tasked with vetting startups and founders’ background among other technical aspects.
Angel investors have also associated themselves with reputed institutions such as IITs to invest in startups incubated in colleges.
Startups sending their funding pitches to these networks should, however, pay heed to the advise of Pillai of Vibeapp. He says, “It is good to have local angel networks emerging in small towns as money will flow faster into young startups, but local angels don’t have a good understanding of tech startups, hence they sometimes come with unrealistic expectations about return on their investment or amount of equity they can pick up in a seed round.” That said, he is hopeful that as the ecosystem matures in smaller towns, these challenges will vanish.