Alok Mittal of Canaan Partners raised a red flag about India’s Angel investing scene yesterday: It needs to be fixed fast. The early stage fund surveyed five accelerators/ incubators in India and five large Angel groups in the country and found that Angel investing in India needs to be fixed and the Accelerator incubator scene could use some tweaking.
First, lets take a look at deal progression. The picture below is of how deals have progressed over a 2 year period. What it says is that only 27% of companies graduate from seed to angel round and only 20% graduate from angel to series A round.
Now lets see how its broken (paraphrased from an interaction with Alok):
Say most of the seed financing happens at a Rs 1 cr valuation. Angel financing happens at Rs 6-7 cr valuation. Which means that between the seed stage and the angel stage, there is a 7x improvement in valuation. Only about 27% of companies raise Angel round. At this rate, even if only a third of the companies make it to the Angel stage, seed investors make more money than they invested. But that is not the case in the Angel stage. Series A funding usually happens between Rs 20- 25 cr. Say you put in Rs 5 cr in Angel round and get a Rs 20 cr valuation at Series A. You’ve made about 4x the money on that deal. But according to the survey, only 20% of your companies are going through from Angel round to series A. Which means that you are making a loss on the whole.
What can be done? “You need to create more companies at the angel stage that graduate to series A. If today 20-25% are graduating, you need to take it 30-35%. Or, you need to create more value so your series A companies get more valuation,” says Mittal. On the resource portal setup by Canaan, it says that the survey was informal and not a rigorous one, but the trends established in them are mostly right.
Mittal warns that if deal velocity or valuations don’t go up, you could see a contraction in the market. That could be dangerous to the ecosystem.
Now lets take a look at some good news. The startup pyramid is getting better. In 2006, there were 7 active angel funds and 43 active VC investors. But in 2012, there are 32 angel funds and 48 venture capital investors. So the deal flow and number of early stage deals have improved. This upward trend needs to continue and for that, the ecosystem needs to see more exits.
Listen to Alok Mittal explain the hypothesis in this video.