Angel investing has become an asset class globally
I first become acquainted with the term 'angel investor' when IIT-Bombay alumnus Rakesh Mathur invested $250,000 in my first company RightHalf.com while I was still in my final year of engineering. Apparently, the word 'angel' came from Broadway Theater, where wealthy individuals saved theatrical productions from shutting down by providing them money. The phrase made its way to Silicon Valley where successful entrepreneurs and individuals gave their own money to promising entrepreneurs to pursue their ideas as a company. It was neither charity nor was it a professional investment. Though it would be fair to say that the angel’s reason to provide seed funding to the startup went beyond monetary returns.
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Earlier this year, I was invited to participate in the first Angel Summit at Dublin, Ireland. The event was held last week and attended by a few hundred angel investors from across the globe. The parent event, Web Summit, had grown 100-fold from 400 attendees in 2010 to over 40,000 attendees in 2015. At the event, I interacted with an ex-US marine Corp who was an angel investor in Uber, a non-tech entrepreneur who was on the board of Elon Musk’s SolarCity, the founder of the infamous social network Bebo, an Irish rugby player who invests in startups, and many more interesting angels. However, angels investing their own money were a minority at the event. A show of hands revealed that most attendees were investment professionals looking to invest someone else’s money in upstarts at the seed stage. They were at the summit to learn how to do angel investing.
During a chance lunch encounter at a standing table, friendly banter with a couple of good-natured Brits ensued. One of them introduced himself as manager of a startup accelerator that worked with entrepreneurs in the pre-idea stage. The other was a professional wealth manager who was learning how to do angel investing on behalf of his clients. They poked fun at each other:
“Pre-idea. So what if an entrepreneur comes to you and has an idea?” said one.
“Hang on. So angel investing is now an asset class?” the other retorted.
“...and what is wrong with that?” he offered. We all looked up from the corner of our eyes and thought
I was the odd one out. I introduced myself as an entrepreneur disguised as an investor in order to score the investor badge since it was cheaper. Besides, it got me unrestricted access to all tracks of the event. After lunch, a panel debated the consequences of the newly-passed US regulation that allowed any individual to invest in startups, a privilege that was earlier reserved for accredited investors. There were several platforms like AngelList where individuals could find startups to invest amounts starting as low as a $1,000.
I had been a skeptic of 'institutional angels' when I first encountered them in the fledgling Indian startup ecosystem in 2008. This was due to my experience pitching my second company, Chaupaati Bazaar, to angel groups in India even as I had a US-based angel (Anand Rajaraman) to lead the round. The contrast between the expectations and approach of the two was a little too stark to handle at the time (Read more about it in my upcoming book The Golden Tap). Obviously, I went with the friendly Silicon Valley-based angel and swore to never go to angel consortiums. I argued with myself that only the second-tier entrepreneurs who could not raise money from real angels would raise money from them, thus triggering a self-feeding cycle of doom. With a stiff upper lip, I did not give them a chance to survive beyond one cycle. Sharks, vultures and other predatory creatures seemed a better metaphor for institutions of any nature, than a divine form called an angel. Fast-forward seven years, this concept is a global phenomenon now and it is here to stay.
Angel funds have evolved in various shapes, sizes and forms. Many of those avatars have seen a full cycle of successful returns. Arguably, they have carved out a niche from the territories of VCs and HNIs, while expanding the options for entrepreneurs. Angel funds in all parts of the world have found a reasonable number of companies that raised money from them and then provided exits at all levels - 500 Startups categorises their successes as ponies (exits <$100 million), centaurs (exits >$100 million) and unicorns (>$1 billion, no exits yet).
Just as most startups fail, most angel investments will also fail. Just as successful VCs get more successful by building a brand that attracts top investments, angel funds are getting organised similarly. Just as angel investing is getting institutionalised, entrepreneurship is getting institutionalised as well. With the benefit of hindsight, it seems that we will go through a tough cycle with several individuals and funds losing lots of money but those who survive will only bring goodness to the ecosystem.
In full disclosure, my limited experience as an angel investor with a statistically insignificant portfolio of startups built over four years reveals the following trend: my best angel investments, both in Silicon Valley and in India, happened within the network. I had to power my way into the best investments and convince the entrepreneurs to take my money. Investments made through angel groups remain at the bottom of the list, including a couple of write-offs. I have stayed away from investing in formal angel funds.