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© Arun Sreenivasan There is a shake-up in angel investing, and legacy angel networks are struggling to adapt

Once upon a time, angel networks were a crucial part of India’s startup scene. In fact, they were the startup scene in the late 2000s, when internet startups and investing were taking shape.

Mumbai Angels (MA), Chennai Angels and the Indian Angel Network (IAN), among a host of others, ruled the roost. They evaluated the best deals, were respected by the best founders at the time, and the people leading these networks were well-regarded even by larger fund managers such as Sequoia Capital or Accel Partners. A decade on, these legacy networks are fighting for relevance as competition has shot through the roof, there are internal conflicts of interest, unhappy members and a business model being questioned. 

The role of a traditional angel network is as follows. A few experts understand startup investing and are well-networked. On another spectrum, many individuals have some additional savings with which they want to dabble in startup investing- risky but with the highest potential of return. The experts set up an organisation and say, “Hey we know this industry and can help you invest in startups by showing you good deals, deals you wouldn’t see otherwise. We will take a small membership fee, and a % of deals,”

From small cheques of Rs 10 lakh, pooling up to a few crores at times for a funding round, these angel networks had little competition. They also promised access to larger venture funds for follow-on rounds, mentorship from the individual angels and more. Today, a dozen similar and newer networks promise the same.

One by one, each of the features that made these angel networks unique, have been chipped away at. For example, the promise of better quality deal flow (or the startups you get to evaluate) doesn’t hold for many angels; Seasoned entrepreneurs, such as Cred founder Kunal Shah or Cure.fit co-founder Mukesh Bansal get their own deal flow as their own networks are strong enough and newer/younger founders want to work with them. Dozens of other angel networks, early-stage funds, and founders. 

“What has changed today is that individual angels have their own brands, their own deal flow and don’t need angel networks,” says Sanjay Mehta founder and partner at 100x VC, and an angel investor in startups such as Oyo Rooms, Box8 and LogiNext. 

Information asymmetry, a selling point for some networks is slowly reducing as the ecosystem has grown manifold over the past decade and everyone is more clued in. “Angels have become more educated and although the networks are trying to evolve, the best deal flow may not go to them,” Mehta says.

Cheque sizes are also an issue. Many of the members of MA, IAN and others write cheques of Rs 5-10 lakh each, pooled in for a sizable funding round. But experienced angels say that while lower cheque sizes may allow more investors to enter the ecosystem or democratize it, it makes investing messy and a founder’s capitalisation table (list of investors) very complicated.

“Angel networks have become a massive crowdfunding initiative since no one is paying attention as investors spray and pray. Instead of staying invested for the long term and getting huge exits, angels get forced to exit in the Series A or B rounds to clean up messy cap tables,” says Anirudh Damani, managing partner at Artha Venture Fund, and an angel investor for a decade. 

The best founders prefer raising angel funding from one or two well-known angels, rather than small cheques from many people- which is how angel networks work. This is because as the founder later raises larger rounds from institutional investors, managing the rights of multiple small angels becomes challenging.

Simply, angel investing and early-stage investing, in general, is also much more competitive. Angel networks such As FirstCheque, AngelList, Venture Catalysts and LetsVenture are all targeting the same startups. Mentorship and guidance, also previously considered a cornerstone of angel investing, is now also a part of programmes such as Y-Combinator or Sequoia Capital’s Surge.

“When MA and IAN started, no one else was doing it full time. But today, the value of angel networks just as a facilitator- their original premise-is less relevant,” says Paula Mariwala, co-founder and President of the Stanford Angels and Entrepreneurs India, a group of Stanford University Alumni who invest as angels.

The math does not work.

What’s more, their business models are also now beginning to creak, as multiple fixed costs and shorter timelines are making the model unviable for prospective investors.

To build a sustainable angel portfolio, an investor needs to do at least 10 deals a year, of say Rs 10 lakh each.  For this, he/she may need to pay about Rs 1 lakh per year per angel network as membership fee, and in some cases, 2-3 percent per deal that the angel invests in.

Instead, if the same angel were to become an investor in an early-stage venture capital fund (sizes between Rs 50-300 crore, say), the fund would charge a management fee of 1.5 percent on an average, costing the angel Rs 1.5 lakh per year (although it is paid upfront). That may be equally or less expensive than angel networks, but a VC fund evaluates and does its own deals- it needs no effort from the angel (in this case limited partner- the people who invest in VC funds).

“Majority of the experienced angels have left the angel networks because they weren’t getting good deals or there was too much competition for them. In the end, they figured out that they are much better off creating private investment groups of their own, or as fund managers,” says Damani.

In fact, many of the earliest angel investors in India are  VC fund managers today. Karthik Reddy and Sanjay Nath, who were investors with Mumbai Angels, left it in 2010 to run Blume Ventures. Sasha Mirchandani, who founded Mumbai Angels, has been running Kae Capital since 2011, and Anil Joshi was President of Mumbai Angels till 2013, and now runs Unicorn India Ventures, an early-stage fund.

“The math is leaning towards becoming an LP (investor) in a small fund. It is cheaper for the LP, and a fund looks at 1,000 companies and then invests in 10. An angel network will never have that depth of access,” Joshi says.

Newer business models in angel investing resemble AngelList, founded by Silicon Valley-based Naval Ravikant- an investor in Uber, Postmates and Twitter among others. AngelList pools money as a single vehicle – so a single entity invests rather than 10 different people on a cap table; it doesn’t charge membership fees and has a syndicate model, where investors can participate by applying to back a lead – generally experienced founders or senior leaders.

AngelList India has done 127 deals since 2018, while IAN has done 31 and Mumbai Angels have done 37, according to data from Venture Intelligence. Angels such as Jitendra Gupta, Kunal Shah, Amrish Rau and Binny Bansal have also made dozens of investments in the last few years, indicating the competition legacy angel networks face. And while more deals don’t mean better deals, at the angel level, more deals help distribute risk

Conflict of interest

The changing business model and growing competition did not escape the notice of these networks. But their solution to it created a different problem altogether. Realising that smaller cheque sizes and less prolific angels were keeping the best founders away from them, the Indian Angel Network and Venture Catalysts, from 2018 onwards launched funds. Like a regular VC fund, the IAN fund, for example, is backed by the Small Industries Development Bank of India (SIDBI), Yes Bank, Max Group, Hyundai along with well-known angels like Kris Gopalakrishnan and Kanwal Rekhi.

However, investors and entrepreneurs Moneycontrol spoke to, said this poses a serious conflict of interest. An angel network’s first priority should logically be its members, who are investing, paying membership fees and defining its purpose. But because the fund allows the network to write bigger cheques, the angel network chooses the fund over its members, sometimes by discretion giving an angel a smaller stake while the fund takes a larger stake. 

“If the best deal flow goes to the fund, then why are you paying memberships fees as an angel in the network?” says Damani of Artha Ventures.

A member of a network mentioned above who did not want to be named agreed there is a clear conflict of interest and that some founders were stymied by this arrangement as well.

Mumbai Angels, Indian Angel Network and Venture Catalysts did not respond to a detailed questionnaire from Moneycontrol for this story

To be sure, this doesn’t mean that Mumbai Angels, the Indian Angel Network or others are going out of business anytime soon. But their importance for founders has fallen over the years. There are still many High Networth Individuals – people who have made their wealth away from startups and technology and want to enter this space – who may consider joining these networks. But they are unlikely to get the quality of deals that newer networks or accelerator programs led by global VCs get, investors and founders said. But quality aside, by sheer quantity there are enough founders who need that first round of external funding, where angel networks can come in.