An Angel At Hand

Instead of looking at various other ways of business funding, angel
funding is a viable option, as it doesn't involve too many risks as used to be.
Though there are not too many angel investors in India right now, the trend is
changing, especially for IT companies where angels dare to tread

There is a reason why angel investors are called so. If you are trying to
start a new business or get funds for business expansion, angel investors can be
looked upon as a best bet.

Having a great vision for starting a business alone cannot make an individual
an enterprising entrepreneur. At the end, it is the money one can pump into the
business that will decide whether a person is a good entrepreneur or amateur
businessman.

Most people have the dream to run their own business, but not all of them
have the money to fund these initiatives. Sadly not many budding entrepreneurs
know that there are other people who can help them in this regard. These
investors are called 'angel investors'.

But don't assume that these investors will invest in every business ideas
sent across to them. In fact, it is possible for an entrepreneur to get angel
funding only when his every business thought coincides with that of the angel
investor. Starting from the business idea, strategy, talent, passion, hard work
and everything that accounts for an entrepreneur has to exceed the expectations
of an angel investor. The only thing that the entrepreneur does not have to
worry about is the money limit.

Who is an angel?

Anyone who is a high net worth individual or had established some business
ventures of their own that they later exited from can be termed as an angel
investor. Traditionally, they may be wealthy people. Someone who wants to help
budding entrepreneurs set-up their own company and create wealth is the typical
definition for an angel investor.

Most of them believe it is an equity risk, but consider it more as a
calculated risk.

These days there are a lot of companies that also specialize in angel
investing. Lot of calcula­tions, verifications, analysis and validations are
done before any decision is being taken from their end. Most of these are
US-based; though in India there are a lot more individual investors.

Who should prefer an angel investor?

There are two types of angel investors. The first are those who invest in a
company when the entrepreneur has at a bootstrap. In short this means when the
entrepreneur has some money and a master idea to start a business, but is unable
to do much about it because he just has an idea but no money. The entrepreneur
then approaches the angel and explains all the nuances of his business and
proposes for a funding option where the investor can have a sizeable portion of
the startup's equity.

The second type of investor comes into the picture when an entrepreneur has
already started a company with his own funds and has a fledgling business with
few customers. But he wants to grow his business and faces a financial crunch,
which is where the angel steps in.

It is difficult to attract the first type of investors, unless the
entrepreneur is very clear in his business plans or has a close association with
the investor.

I followed the second method for attracting an angel for my company. I had
approached an investor when I wanted to set-up my own business but that did not
work out. So I started Athena Info Consulting on my own, made it successful,
which in turn attracted the angel investors to me.

The reason I sought an angel investor was because the investment I was
looking at was below Rs 10 million. Had the required investment been more, I
would have sought a venture capitalist (VCs) instead. Most VCs prefer investing
into companies that need finance to the tune of a few crore rupees.

It is unfortunate that most Indian angels prefer to lose money in the stock
market than invest in a budding business. Most Indian investors are comfortable
putting their money into establishments where they can see some activity and
tangible assets that the company has on hand.

Most angels don't want to run their own company. They are people who like to remain in the background and get good return on their investment instead

Particularly they would like to see some activity in the business, the
existence of an office, employees, customer on record, delivery model, etc,
which will assure them that their investment is safe.

However, the American scenario is different as angel and venture funding is
more mature there. The trend began in Silicon Valley, where thousands of
millionaires were created who invested in start-ups.

Indians want to become an entrepreneur even though they do not know how to
run a company. The scenario is changing now and more and more entrepreneurs are
likely to come.

Searching for an angel

Networking is very important to source an angel. A budding entrepreneur can
network himself with non-profit organi­zations like The Indus Entre­preneurs or
Nasscom that are good platforms for meeting a lot of people in the industry.

To attract angel investors it is necessary to know how to present ideas and
sell concepts. Not all angels will be interested in your business idea. Often
you may have to speak to hundreds of investors before catching the eye of one
angel.

This is why it is necessary to be involved in associations like TIE where the
idea can be passed through word to mouth amongst various members. Angels can be
attracted through good results, return on investment; business plans, well
performing teams and good references.

Finding a right angel is tough. Having found an interested angel there are
several factors that should be measured. Angels like to see how the entrepreneur
reacts in various situations.

I have had angel investments twice in my company. The current investment took
a long time of at least six months from the first contact to fix up the
investment.

There can be conflicts between the two parties but it should be in the
interest of the business. One could have four to five angels willing to invest.
At such time the value that each investor brings to the table is very important.
They will be choosy in various aspects, so be prepared.

It is ideal that you should give a realistic growth path, vision, mission,
long term, short term to the angels. The role that angel will play
post-investment should also be decided well in advance.

Risks involved

High risks are involved in angel funding as it can sometimes be pegged down
to the investor's perception about the shape the business is taking. At such
times, it is best to offer the most pragmatic explanations.

It is always best to discuss these things right at the beginning and come to
some understanding so that such incidents are not carried on for a long period.

Rangarajan Sriraman

At times when the growth is higher than expected, angels expect a larger
share. This can lead to clashes, therefore it is suggested that the angel's
funding period is limited to a certain time period ie approximately to three
years.

This time period is mostly enough for everyone to leverage their growth and
get matured. After that period an entre­preneur can either choose to exit from
the deal or continue with the same angel.

It is also possible that the angel might seek a bigger stake in the company
after a certain stage of funding. This is where a concept called structuring can
help.

Structuring is where the entrepreneur and angel both decide on their
respective stake holding in the company at the onset. After proper structuring
neither of the two can claim for more.

In most cases the ratio is 70:30 for the entrepreneur and angel. The latter
prefer to have a lower stake to safeguard their investment in case the business
does not take off.

Though there are not too many angel investors in India right now, the trend
is changing. People are showing an interest in investing in IT companies, which
are amongst the best performers in the entire industry. So the next time you
need funds you know where to look for it.

The author is Director, Athena Info Consulting