The success of many startups in terms of raising larger rounds, going public and getting acquired has encouraged people from smaller cities to venture into angel investing
India’s startup ecosystem is going through a paradigm shift in many ways. One such shift is the rise of angels investors from places beyond major cities. This is despite the risks associated with this asset class.
The trend goes hand-in-hand with the increasing number of founders starting out from smaller cities. Success stories of these founders have led to more angel investors from the hinterland and vice-versa. According to a study by LetsVenture, an online investment platform, investors from smaller cities such as Guwahati, Kanpur, Vadodara, Raipur, Visakhapatnam, Agra, Jaipur, Chandigarh are increasingly ready to bet on innovative business ideas. In fact, 30 per cent of the investors on LetsVenture are from Tier 2 cities.
Factors Leading To The Shift
One of the prominent and obvious reasons behind this shift is the internet penetration and digital adoption in India’s hinterland. Another phenomenon that has triggered more interest in investing in startups is the overall rise of the Indian startup ecosystem in recent times.
“With startups raising larger rounds, going public, getting acquired etc, the liquidity events in the ecosystem have increased manifold which has delivered stellar non-linear returns to their investors. This has propelled a higher level of interest from angel investors from tier II and III,” said Shanti Mohan, co-founder and CEO, LetsVenture.
Mahavir Pratap Sharma, co-founder and chairman, Rajasthan Angel Innovators Network, agrees. “The success of many startups, both in terms of valuation (exits at various levels and IPO’s) and many having great bottom lines have encouraged and inspired many non-tech entrepreneurs to dabble into angel investing,” he said.
He believes that most of these family-owned business entrepreneurs and their respective younger generations are leading the way and hence steering the angel investment in cities outside of Delhi, Mumbai, Bangalore and Hyderabad.
Additionally, several small-scale investment networks have set up their base at these places, making angel investments more feasible in tier II or tier III regions. Moreover, according to K Chandran, CEO, The Chennai Angels believes, these regions have seen widespread development through the years. “It is not uncommon to find high net worth individuals in such areas, who are willing to invest in growing businesses,“ he said.
Though there was a gradual transition of low cost and quality of life driving many angels to live in quieter and tier 2 cities over the last 3-4 years, the pandemic has just expedited it. The WFH and work from anywhere and no travel required has just dramatically changed this in the last one year, which possibly could have taken 4-5 years,” added Sharma.
Lastly, the pandemic has enabled virtual meetings from anywhere in the world and angel investors can cut costs onreal estate, travel and stay. “COVID-19 has enabled entrepreneurs to build companies from anywhere in the country outside of the major metropolitan cities. Coimbatore, for instance, owing to its proximity to Chennai is slowly emerging as a great hub for SaaS companies while Jaipur has spawned a host of consumer-focused startups and some of them are on the verge of becoming unicorns,” said Mohan.
The Edge Regional Angel Investors Have
Regional angel investors have a certain upper hand over others in terms of understanding region-specific issues. “The local angel investors bring a deep understanding of the regional problems, getting to know the entrepreneurs and ability to mentor and guide the founders closely. This is very critical as angels largely invest behind entrepreneurs,” said Padmaja Ruparel, founding partner, IAN Fund and co-founder, Indian Angel Network.
And as the local angels invest, it gives more confidence to investors from other regions/parts of the country. “This brings in a larger amount of funds for the entrepreneurs leveraging the brand and depth of the local angel. And this builds the power of promoter and peer investing,” she said, adding that IAN has invested around India and in 6 other countries with investors from 12 countries.
Regional angel investors already know how the market works in the area and are well-connected. “This, in turn, benefits the startups that they invest in. Any angel investor wants to see their invested startups succeed and will do their best to support them by opening doors to potential customers or partners through their own networks,” said The Chennai Angels’ K Chandran.,
Regional angel investors also have a very deep understanding of business fundamentals and have a strong financial acumen. “Even if regional angel investors may not be able to understand all the nuances of technology they are good evaluators of businesses. From my personal experience, I have seen that regional angel investors can add a lot of value to entrepreneurs from these regions,” said LetsVenture’s Mohan.
Things Aspiring Regional Angel Investors Should Know
Even though the domain looks fancy at the outset, it involves high risk and has a multitude of challenges. “Individuals should also be wary of the fact that angel investing is an extremely high-risk investment given that over 90 per cent of the startups fail,” said Mohan.
And, like most professions, knowledge on the subject matter is the key. “Understanding of tech space, reading & learning more and more about various verticals that they want to invest in, have a team of people to provide data analysis, and lastly have the business acumen with an assessment of the current market and future market,” advises Rajasthan Angel Innovators Network’s Sharma.
The ideal thing to do while starting out is to either actively participate in the angel network of their choice or piggyback on other senior investors and learn from them. “Individuals who are keen to become angel investors can join local angel chapters to gain an understanding of the sector. However, I would also like to advise aspiring investors to familiarize themselves with the SEBI guidelines with regard to angel investing and only rely on trustworthy platforms while deploying their capital,” said LetsVenture’s Mohan.
Since angel investing is a very high-risk asset class having a high-risk appetite is very important. “Given it can take anywhere from 5-10 years or even more to see returns on the investments, angel investors must be extremely patient. Unlike public markets where one has access to plenty of data, private market investments lack the same depth of data especially in early-stage or angel investing,” she added.
Apart from studying the various business, legal and financial aspects of angel investments, it is also important to be able to foresee success. “It is always good to have the gift of foresight. Sometimes angels need to bank on things such as the Founder’s levels of passion and expertise,” said The Chennai Angels’ Chandran.
One important quality an angel investor needs is patience. “Right from screening startups, to the elaborate funding process and then waiting years for an exit, it takes immense patience and confidence to be able to withstand the pressures of being an investor,” he added.
IAN’s Padmaja Ruparel sums up things that every regional angel investor should do before starting out:
- Allocate a sum of monies to be invested across startup opportunities
- Build a risk mitigated portfolio of investment
- Leverage the knowledge of other investors
- Join a large angel investor group that has a large flow of investment opportunities
- Have a full-time team to handle the entire value chain from scouting investment opportunities, investing and divesting to provide returns
- Develop the agility to adapting to changes
- Build on skills such as fast decision making, the ability to coach the founder(s) and not captain the company, and be able to sleep without fretting.