Angels rush in where VCs fear to tread in India

Traditionally, rich Indians, especially from the smaller cities, have been investing in real estate and gold. They presume that these have assured returns. Some of them dabble in equity investments, but not many have a clue about investing in startups.

This is fast changing as the startup scene in India gets increasing media attention. High net worth individuals are becoming aware that angel investments can yield big returns. They know these investments don’t have an assured rate of return and the risks are higher, but they aren’t willing to lose out on the opportunity to ride on the boom in sectors like ecommerce, mobile apps, or big data.

Most angel investments are concentrated in Bangalore, Mumbai, and Delhi, where a startup ecosystem has grown. But lately, there has been investor interest in startups from other cities and even small towns. This is mainly driven by individual angels or angel networks which are creating a bridge between the investor community and premier tech institutions. Many institutions such as IIT Kanpur, BITS Pilani, and IIM Ahmedabad are located in the smaller cities, and they have entrepreneurial cells. These are linking up with angel investors.

Wannabe startup hubs

Lead Angels, for instance, has set up an office in Ahmedabad, which is culturally similar to Mumbai, with a vibrant business community. Another city they’ve entered is Hyderabad in the south, which vies to be a tech hub like Bangalore.

ah! Angels recently invested in Jaipur-based edtech startup Logicroots even though it does not have a base in that city yet. The Harshad Lahoti, founder of ah! Angels says that they are working with global networks of entrepreneurs like The Indus Entrepreneurs (TiE) and National Entrepreneurship Network (NEN) to encourage the rich gharanas (families) of Jaipur to make angel investments. This is a first step for entrepreneurial ideas from these smaller cities to reach out to bigger private equity investors and users.

The networks have been trying to persuade investors to join by showing them their proven ability to discover startups that have given handsome returns in a short period. ah! Angels, for example, profitably exited Chennai-based education technology startup Harness Handitouch within two years.

Among the highly funded companies from the smaller cities is Jaipur-based auto portal CarDekho, which has raised a total of over US$65 million from Chinese investment management firm Hillhouse Capital, Hong Kong-based hedge fund Tybourne Capital, and global private equity investor Sequoia Capital, among others. Another big player is Ahmedabad-based ecommerce firm Infibeam which is running without external funding.

Ripple effects from the big three

“It’s true that the three major cities (Mumbai, Delhi, Bangalore) have 90 percent of the country’s startup ecosystem. But we must take heart from the fact that it was more like cent percent a decade ago,” says Ajeet Khurana, an angel investor who has invested in Pune-based gaming company Rolocule and online healthy snack firm Snack Experts.

Kochi-based accelerator Startup Village

These places haven’t yet seen significant VC attention because they lack support systems critical for growth at early stages. “For entrepreneurship to thrive, one needs a large pool of talent, and facilitators such as incubators and co-working spaces. You also need a culture that, in the best case, encourages entrepreneurship, and in the worst case, does not look down upon starting up. In addition, seed investors, angel investors, and VCs have to provide the necessary risk capital. The three top metros have an abundance of all these ecosystem participants. But other cities too have woken up to the possibilities of starting up. So things are headed in the right direction,” explains Khurana.

The startup ecosystem in the three main hubs also has ripple effects. Bangalore is inspiring other southern cities like Chennai and Hyderabad to catch up. Mumbai is the anchor for sister cities in the west, like Panjim (Goa) and Ahmedabad. In the north, Delhi is the startup hub, and Jaipur is the emerging one which is just a five-hour drive by road.

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