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Needed: 10,000 Angel Investors
January 27, 2007
The slightly built young man sitting across the table from me did not look like the typical entrepreneur one meets in India. He wore thick rimmed spectacles, and had close-cropped hair and a Ph.D.
"So, what do you think of my business idea?" he asked.
I hesitated to reply. In one respect at least his business idea was possibly a great one�it was something I had never imagined as a possible business. After all, when the Wright brothers managed to stay aloft in their contraption for ninety seconds who would have imagined that it was the start of the gigantic airline industry.
The young man had emailed me out of the blue wanting to bounce off his new business idea.
What intrigued me was that this was the third such request for "advice" that I had received this week. And last week there had been another three.
All were based on a genuine technological innovation. All the ideas served to meet a genuine need or solve a pain point in the lives of millions of people. None of these prospective entrepreneurs was from the traditional business communities. Practically all their fathers were professionals, not businessmen. All were products of elite institutions like the IITs, National Institutes of Technology, Indian Institute of Science, or the IIMs.
Yet they all have a common refrain�they are finding it difficult to get venture capitalists interested in their ideas.
In a sense, this is understandable. A venture capitalist fund of $150-200 million may have a genuine problem in financing a start-up this early and this small. The fund's overhead cost limits are such that they can afford at best two or three experienced people to find and make investments and work with entrepreneurs. This naturally limits the number of deals they can do to ten or fifteen a year. Thus, they tend to concentrate on deals of larger sizes, say, and a minimum of Rs 10 crore as the starting investment. But what the new breed of talented, young entrepreneurs needs is just a fraction of that amount. On the other hand, they need dollops of time from their investors to guide them through the crucial initial steps of establishing a business.
The business ideas that are emerging this year are very different from the ones of the Bad Old Eighties.
The ideas of that time mostly involved cornering manufacturing or import licence for something that was in short supply. Unfortunately, in that regime there was absolutely no incentive to invest time in technical innovation to, for example, reduce manufacturing costs, because you could get far higher results by influencing the Customs or Excise officer to classify your product under a category that attracted a lower rate of duty.
Highly qualified young graduates of our top institutions had no stomach or perhaps no family connections to play these games, which is why so many of them emigrated to the United States during that time.
Today's new crop of young technology entrepreneurs sees a ray of hope. Domestic markets getting to be large enough to support innovation, the technical innovation needed is something they feel they can master. But they are getting stuck at the first step�finding the capital for their start-up ventures.
In the United States, that haven of innovation and entrepreneurship, this financing need is filled by a group called "angel investors". These angel investors tend to be recently retired entrepreneurs and company executives. They have the patience and skills to complement what the young entrepreneur lacks�tips on where to find a good lawyer, when it is worth applying for a patent and when it is not, what to look for when you hire people, where to find good talent, tips on how to and how much to delegate. In short, all the tacit knowledge that only a lifetime of operating experience in excellently managed companies can give you.
The capital such angel investors need to put in is in the Rs 1-2 million range. This will help the young entrepreneur take the first step, set up shop, make a working prototype of his new product and find the first few customers. This capital will help him focus on the crucial product development stage and not get distracted by having to earn revenue from unrelated activities merely to meet payroll.
In the US, in 2005, according to the University of New Hampshire's Center for Venture Research, the total amount invested by angels exceeded the amount invested by venture capital funds.
There are already a number of such angel investors operating in India but the existing numbers are too little for the scale of innovation needed or possible in India today. The Center for Venture Research estimates that there are about 200,000 angel investors in the United States. By this count, India needs at least 10,000 of them.
What will bring India's seasoned and recently retired company executives into the angel role? What policy formulations will enable this?
Ajit Balakrishnan is the founder and chief executive officer, rediff.com.
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