Indian start-ups becoming increasingly attractive for overseas angel investors

The first stop for external capital for start-ups is most often the angel investors.

A vibrant angel investor community is critical for India to sustain its position as one of the leading start-up hubs in the world. Angel investors are individuals who invest their personal capital in early stage start-ups, in exchange for equity positions. Since the badge of an angel investor has become socially desirable in modern times, angel investing attracts people from varied backgrounds: those from traditionally wealthy families, successful entrepreneurs, corporate leaders, professionals (such as doctors and lawyers), sportspersons, celebrities, and so on. In recent years, there has been a significant growth in the number of angel investors investing in Indian start-ups.

Here are some important traits of the angel investing community in India.

Overseas investors

According to data from YNOS Venture Engine, close to one-thirds of the angels investing in Indian start-ups are from overseas locations.

This indicates that geographical proximity is no longer a major investment criterion. The ability of Indian start-ups to attract investment from overseas angels also indicate that Indian start-ups have significantly evolved to match the expectations of global investors.

An important implication here is that Indian entrepreneurs should expand their investor search to the global horizon and not restrict it to just India.

About 45 per cent of angel investors in India are in the age bracket of 45– 60, indicating that they are in the most productive phase in their professional careers. The professional experience of the investors can significantly benefit the start-ups that they invest in.

In addition, the widespread age profile of the investors also indicates a high degree of demographic diversity among them. This, in turn, can lead to investments in diverse start-ups.

Tier-2,-3 cities

Despite the growth in the number of investments as well as investors, the flow of investment has been restricted to few pockets.

A significant percentage of the investors have been investing only in start-ups from Tier-1 cities, that is Delhi, Mumbai, Bengaluru, Chennai, Hyderabad, Pune, Kolkata and Ahmedabad. The number of angels investing in Tier-2 and -3 cities as a percentage of those investing in Tier-1 city start-ups has been just 9 per cent and 3 per cent respectively. If the start-ups have to blossom in the interior regions of the country, there is a need to dramatically increase the flow of investments in start-ups in Tier- 2 and -3 cities.

Emphasis on diversity

There is great emphasis on diversity in businesses today. Diversity in workplace has been shown to have a positive impact on performance.

There has been an emphasis on having women directors in the boards of companies as well. The proportion of women angel investors is just six percent. Attracting more women angel investors would enhance investor diversity and significantly benefit entrepreneurs.

However, a point of concern is that the attrition of angel investors has been high. Out of the number of investors who become angels, more than 40 per cent drop out within three years after making their first investment. This shows that if the number of angel investments have to grow, percentage of growth in new investors should also be high.

One way to reduce the attrition of investors is to provide them reasonable exits, so that they are able to recycle the capital for investing in other start-ups. In the absence of exits, it would be difficult to get the existing investors to continuously pump in more investments after their target allocation for investing in start-ups is achieved.

(The writer is Professor, IIT Madras; Associate, Harvard Kennedy School, Harvard University)