Learning from the Angels: Tips Indian VCs can pick up from their international counterparts

By Apoorv Ranjan Sharma

The startup industry in India is booming, and so is the country’s investment ecosystem. Since the turn of the year, Indian startups have raised a mind-blowing $1.42 billion dollars through various investments. The first quarter of 2016 alone saw more than 300 investor deals, marking an exponential growth of 108 percent over the previous year’s numbers for the same duration. Such a massive growth in the number of investments has mostly been made possible as a result of a greater involvement from the country’s HNI segment; the number of private investors and investment firms operating within the country has grown by 100 percent in the last one year. The message being sent out is clear – the investment community in India is slowly, but steadily, achieving maturity and is waking up to the potential locked within the startup industry.

However, impressive as these numbers are, there still remains much scope of improvement for the country’s investors, especially in the early-stage investment sector; despite the phenomenal growth, India lags behind global startup leaders USA and China in terms of the early stage investment support. Consider the numbers for a clearer understanding. The number of active angel investors in India stands approximately at 400-500, a paltry sum when compared with more than 3 lakh angels currently active in the US and China’s 16200 early-stage investors. Moreover, the number of early-stage deals completed within India barely touches 200 on an annual basis. With angels in the US completing an average of 3000 deals in a year and their Chinese counterparts driving more than 2000 annual angel investments, a starker contrast could not be created.

This is where the Indian players need to pull out a leaf or two from the playbook of the international venture capital community. Even though India as a target market is very different from a more mature economy, for example the US, the fundamental principles of business and investment do not differ much. Given the fact that the international VCs have been in the game for a longer duration of time and have witnessed many more ups and downs over the years, Indian investors can glean key insights from the successes and tribulation of their global counterparts and work towards optimising their approach.

Foremost on the list must be the development of a sustainable, holistic, self-nurturing ecosystem to boost start-up growth. Even though the investment landscape within the country is growing at a healthy rate, the aspect of investment is still being treated in isolation with other start-up requirements such as mentoring, technological expertise, financial and CA services, networking and logistics. This approach can be very detrimental to the growth and success of the Indian start-up sector, as any start-up needs access to a comprehensive array of auxiliary services for sustainable growth and scale. Case in point is the recent turbulence faced by hyperlocal start-up ventures in the country. Despite having raised more than $170 million in investments, several ventures operating in the space have had to either pivot their business models, scale down their operations or completely shut shop in recent times. This highlights the fact that investment alone cannot be considered to be the sole driver for success, and that inadequate support can often spell doom for a start-up. The focus, therefore, must be on integrating various businesses, verticals, services and platforms to promote symbiotic growth for all key stakeholders.

Recent government reforms, such as the launch of the Start Up India campaign, are extremely encouraging in this context. The move to build a start-up intensive infrastructure within the country is a step in the right direction, and will serve to create a tangible difference by the start-up industry’s continued growth and success. Moreover, the campaign’s blueprint contained provisions to develop and nurture the investment landscape within the country and to incentivise indigenous HNIs into taking up the mantle of angel investors. This is good news for the start-up as well as the investment community; the study of developed start-up oriented economies demonstrates how angel investors gradually drive bigger and bigger investments and mature into full-fledged venture capitalists and private equity investors.

Another thing that the country’s investment community can learn from the international start-up ecosystem is the need to foster a dedicated start-up culture. Consider Israel and the niche the country’s entrepreneurs have carved out in the global arena. India needs to develop a similar, start-up centric culture which can ensure a steady influx of entrepreneurial successes, generation after generation. After all, today’s upcoming entrepreneurs are tomorrow’s mentors, investors and enablers. As such, creating a comprehensive start-up centric approach can help nurture global successes from within the country’s ventures over a sustained duration of time.

Investors and start-ups in India also need to learn to be bolder in their decision-making. Why choose the same business model that a dozen and one other start-ups are already implementing? Instead, focussing on disruptive start-ups, particularly the ones that leverage technology to address a market gap, can help boost the probability of success.

Lastly, Indian investors need to consider the aspect of valuation and its role in ensuring success. As many of the country’s more prominent start-ups are currently overvalued, there is a good chance that investors might find their returns limited once the valuation catches up to the start-up’s actual worth. Considering the overall picture such as a start-up’s impact, outreach, competition and differentiating factors before the funding can help investors in maximising their returns.

The author is co-founder, Venture Catalysts