Quite a few institutional funds in India are actively investing in early stage startups. Historically, most of the VC funds apart from lip-service, have stayed away from investing in early stage startups primarily because of lack of bandwidth on their side to manage their portfolio.
The reason why they are now investing heavily in early stage startups is because the pipeline is drying and the existing ones are getting too competitive. Investing early gives access to some of the high growth companies at a much lesser and cheaper valuation.
All good. For the investor.
But, getting in to bed with a big fella has its own prons and cons for the entrepreneur.
Raising funding from a big brand helps establish one’s own brand which not just helps in hiring, but also in building the next level of growth (for instance, the investor will bring customer connects etc).
Plus, you don’t negotiate with 15+ angels which is a pain in the butt For instance, cofounder of a well known tech startup (raised money from 18 angels 4 years back, and no one is exiting) has spent 2 months on the road to meet all current angels in order to get SHAs etc signed up for their current round of massive funding.
Taking money from just one entity solves this and brings much operational comfort to the founders.
BUT. And the big but is in a few areas that entrepreneurs should be ready to face:
1. High probability that no angel will participate in your current round.
Most of the angels aren’t comfortable participating in rounds where VCs are also involved. They are mostly worried about valuation and lack of control in the company (as good as being treated like a ‘second wife’).
Face that. Be ready to lose your angels, unless they are friends and families. Ofcourse, angels who are comfortable with you and really want to be a part of your startup will be okay with this arrangement, but those who are unsure will probably opt out.
2. What If.
Investing business runs on perception (No investor will ever agree with this, but that’s the reality). So imagine you have raised angel round from an institutional fund and for some reason, the fund decides not to participate in your Series A.
From a hot chick, you are reduced to ‘achuut kanya‘ (untouchable). Other VCs will just not look at a startup which isn’t in good books of the current investor. The word goes out that ‘something is wrong’ with this startup.
3. Yo. Acquire?
Without naming any company, let me tell you this – some funds have made acqua-hires an easy decision just by the virtue of them investing in early stage startups who are in ‘similar’ (not same) space as some of their existing bigger portfolio.
In fact, even if you meet your milestones, the investor can force you to get married to one of their portfolio as they want the bigger egg in the basket to grow bigger and better.
In the long run, raising angel funding from institutional funds can work in your favor, as long as terms and conditions are laid out in the beginning. But then, it’s tricky and worth it if you have the confidence and the funding knowledge to make it work.
What has been your experience?