Why are CEOS turning into angels?

For Krishnan Ganesh, having his back to the wall was n o t a n e w e x p e r i e n c e. S o i nst e ad of c re at i ng a f uss over being rejected by venture capitalists, the fighter in him got into d e f e n s ive mod e a n d c a me o u t swinging only when the time was right. And when that happened, he struck a blow for all entrepreneurs who had often been caught on the wrong side of a VC’S mood swings. After tasting success with his BPO venture Customer Asset which was bought by ICICI, Krishnan Ganeshdecided to star t a niche market research company,

Marketics, in 2003. He approached many venture capitalists to seek growth capital , but no one would give him the money. It was a fr ustrating experience. Wit h n o a n g e l f u n d i n g e c o s y s - tem to tur n to at the time and no VC money, the founders did everything they could to save costs - including using rented computers. Four years later, Marketics was eve n t u a l ly b o u g h t by WNS fo r over $63 million. It was to become a t u r n i n g p o i n t i n G a n e s h ’s l i f e. He s u b s e q u e n t l y f o u n d e d Tutorvista and set out to become an angel investor himself to fix the system,so that entrepreneurs like him didnt have to be entirely at the mercy of VCS.

“VCS look for predictions and t r a c k r e c o r d s . P l u s t h e y t a ke months to decide whether they want to fund you or not. I’ve done deals in 2 days, and handed over cash in a week’s time. For me, what matters is what value I can add to a p ro misi ng- l o o ki ng c o mpany,” says Ganesh, who has since invested in six companies as an angel investor and continues to actively s c o u t f o r e c o mmerce s t a r t u p s. Like him, many senior executives are drawn by the thrill of living v i c a r i o u s l y t h r o u g h f i r s t - t i me entrepreneurs.

Others want to share the benefit of their knowledge and exper i e nce. “People who’ve been i n the trenches often reach a point when they feel like they can contribute to other star t ups,” says P r ave e n Gup t a , p r e s i d e n t a n d cofounder market research and analytics fir m Cross-tab, “Apart from writing a cheque, they also provide access to their networks a nd b r i ng i n t he i r e x p e r i e nc e, expertise and contact networks.” Virtue and value But there’s another group of executives who are becoming ang el investors for the oldest reason of all - money. “Today angel investing has become fashionable as a new asset class of sorts,” says Sharad Sharma, adding that this isn’t necessarily a good thing, “Of the large numbers of angels around, only a few actively take the lead on due diligence, creating term sheets and joining the management boards of startups.

T h e va s t majo r i t y p r e f e r s t o sign cheques.” He states the examp l e o f Vayavya Labs, where 5 9 members belonging to the Indian Angel Network (IAN) collectively invested a million dollars. However, o n l y t wo - S h a r ma a n d Vive k Raghavan - have taken the lead. A serial entre preneur and angel investor since 2005, Shar ma was e a rl i e r CEO o f R& D at Ya h o o ! India.

He i s c u r r e n t l y c h a i r o f t h e NASSCOM product forum and an investment committee member at the India Innovation Fund. While his commitments don’t deter him from taking on more investments, he says he gets closely involved only with one or two deals a year. There are a few companies where he is a passive investor too.

Angel networks like Mumbai Angels and the Indian Angel Network have succeeded in creating confidence among many executives looking for like-minded investors to work with.

Then t here are t hose like Vishal Gondal, founder and CEO, Indiagames. Gondal prefers not to b e p a r t o f any angel network for his own reasons. “I think the networks are doing a g reat job. But t heir focus i s on getting a lot of angels together to invest smaller sums in more startups. I c a l l t hi s a ‘ s pray a nd pray’ approach. I prefer to invest in fewer companies and hope that 100% of them succeed,” he says.

Choosing the right investment is the tough part. Gupta says he has t hree pr i nci pl e s fo r choosing companies to invest in - “The company must doing be something I know and something I believe in. The size of investment must also be just right.” T h e g o i n g i s n o t a lw ay s smooth. Ask Anand L a d s a r i ya , d i r e c t o r at Everest Flavours, a Mumbai-based manufacturer of mint-based prod- u c t s . L a d s a r i y a a lw ay s k n e w t hat ang e l i nvest i ng was r i s k y, but even he was stunned when it tur ned out that a promoter at one o f hi s i nves t e e c o mpanies had spent time in a US jail. “He never disclosed it when we funded him. In fact, he had changed the spelling of his name to avoid being d e t e c t e d he re. We ha d a l re a dy i nve s t e d i n h i m, s o t h e r e was nothing we could do exce pt tell him we would not be giving him any more cash,” says Ladsaria, who says legal options are few for angel investors in these situations. Usually, such situations can be avo i d e d i f the a n g e l i nv e s t o r shares a good wo rk i n g relationship with promoters.

Most of the t i m e, t h e startup is desperate for g rowth m o n e y, b u t d o e s n ’ t re q ui re a d d i t i o nal handholding or unsolicited advice. WPP’S India country manager Ranjan Kapur says that while he kee ps himself at ar ms l e n g t h wi t h c o mpa n i e s whe r e the invested amount is smaller, he insists on a personal meeting if there is a lot of money at stake; “Being on the board of a startup is a bad idea. An angel must guide without interfering with the running of the company,” he says. Kapur, who stumbled onto angel investing in 2004 when a friend who asked him if he was interested in an of fshore jour nalism venture, has invested in around ten companies and exited two of them so far. Sharma says that senior executives must realise that the drivers of success for big companies are very dif ferent from those of star tups. So while a well-meaning CEO of a large corporation may want to help an investee achieve quick results, they may end up doing more harm than good.

“We’re trying to create a dif ference between angels who are pure corporate executives and those who have entrepreneurial experience. The for mer are more suited to be specialist advisors, while the latter can be mentors,” Sharma says.

Gondal’s example is a case in point. Having received seed funding at age 22 for Indiagames (subsequently sold to Disney), Gondal realised the importance of angels early in life.

“Some idiot believed in me at the time; so when I had the opportunity, I wanted to become that kind of idiot myself and ‘give back’ to promising companies,” he says. Like Ganesh, Gondal is quite critical of Venture Capital funds, whom he calls ‘sophisticated hedge funds’ . “They claim to invest in startups, but they all want some sort of track record and will readily hand over millions of dollars but not a few lakh rupees.”

His own investments are in the Rs. 50 lakhs to Rs. 1 crore range and he has invested all over the country - including Instablogs, a Shimla-based company that had been advised by VCS to move to a metro like Delhi or risk oblivion. “I told them to stay put, as their overheads would multiply i n a met r o, ” Gonda l r e c o u n t s. Gondal has had no for mal instruction in how angel investing works, but says his own experiences have helped him guide other companies. “When I built Indiagames, I lear ned how to survive over time. For example, I have always handl e d a l l media i nt e r a c t i o ns fo r India g ames myself. These days even star tups want to hire a PR a g ency. I tell them not to waste t h e i r mo n e y o n mi d d l e me n . ” Conserving cash has become even more impor tant, in the cur rent bus i ne s s cl i mate. K Ganesh o f Tutorvista says that the real problem being faced by angels is the lack of exit options, due to the relatively few Series A and B venture capital (VC) funding.

“Angel i nvest o r s a re c o ming under pressure since their money i s l o cked i n t he c o mpany unti l the promoters or VCS buy it back. A n d w i t h we s t e r n e c o n o mi e s c o mi n g u n d e r s t r e s s, ove r s e a s VCS are extra cautious,” he says. While this doesn’t bode well for angels , executives are positive that the situation will improve. “In my opinion, a tough economic climate hel ps di s c i pl i ne promoters and discourages them from being profligate,” says Ladsaria, who is undeterred by the global slowdown and is betting on startups in the mobile applications, e-commerce, retail and media space to deliver high value to investors in the next few years.