I enjoy being an angel investor, and I believe this is the perfect time to be an angel in India. There seems to be a funding winter, and a lot of the institutional, seed-stage investor money which came from VCs has started to dry up, as evidenced by the Snapdeal and Stayzilla fiascos. VCs no longer seem to be keen to pull out their chequebooks and provide irrational valuations for startups. Thanks to this, founders are much more respectful towards angels, and treat them better, because they finally appreciate the value of money. Because money is in short supply anyone who’s willing to provide it is in great demand.
The startup ecosystem is market-driven, and the supply-demand equation has now tilted in favour of angels. While it may seem that entrepreneurs will get a raw deal, this is not true. Sensible entrepreneurs who have a viable business plan with a clear pathway to profitability, because they understand the importance of unit economics will actually find it easier to attract capital from mature angel investors who have a long-term perspective.
In fact, it was the irrational exuberance which was injected into the system by VCs who had too much money to spend which messed up the startup ecosystem in the first place. This caused founders to lose touch with reality, because they all expected sky-high valuations for their startups. When things become over-heated and expectations started entering bubble territory, many sensible angel investors withdrew. The problem is that none of these bidding wars and funding manias end well, and when the bubble pops, as it finally always does, everyone gets hurt.
Why Angel Investing Is Ripe To Shine
This is the nature of the beast, partly because VCs are incentivised to behave in an irrational fashion. They are under a lot of pressure to perform because they’re always thinking about raising their next fund. Because they need to invest large amounts in order to move their needle and get a significant return on their investment, they are only interested in doing big ticket deals.
Putting a rocket engine in a motor-cycle is a recipe for disaster. The startup’s processes and systems are not mature enough to handle this large infusion of funds, which is why it just catalyses a death spiral and causes the startup to implode.
Angels, on the other hand, are better suited to leading seed-stage investments. Because they deploy small amounts of money, they need the founder to be frugal. Since they are investing their own hard-earned personal funds, they need to picky and choosy, which is why they are far more likely to invest in sensible frugal founders who make better use of the investor’s money.
These startups will grow linearly, but because they’re more likely to become cashflow positive sooner, they will be able to grow exponentially after they have matures. This increases their chances of becoming successful over a long-term horizon, because they will not drown in too much cash, which often leads to rash overspending.
For now, it seems the VC funding party is over and once we get over our hangover, we need to go back to basics, we can build sustainable businesses which have a sound foundation.
[This post by Dr. Aniruddha Malpani first appeared on LinkedIn and has been reproduced with permission.]