Angel Investment Fatigue In India

Indian angel investors are suffering from investment fatigue. The mature, more experienced investors, who started angel investing about 5-10 years ago, are no longer investing in new startups. This is because they have not got a decent return on their investment, and don’t want to burn their fingers anymore. Lots of them have been harmed by crooked founders and greedy VCs, which is why they feel angel investing is a mug’s game.

While angels will talk about how smart they were when they picked a 100-bagger, the reality is that the vast majority have done very poorly. Sadly, most angels don’t even bother to track their returns, and while they remember their jackpots, they forget the other startups in which their money has remain locked up for years, with no possibility for an exit in the future.

While angel investing can be very exciting when you do it for the first time (it gives you a heady feeling, because you are hoping to find the next Google) most angels haven’t had any successful exits. While some of their companies may have raised more money at a higher valuation over the years, even these are still muddling along, without being able to scale up or grow. Many find it hard to raise money for the next round, which means they’re in the state of limbo. Angels are stuck – they can’t exit, and they don’t get an adequate return on their investment. They are hopeful that something good will happen, every time the company pivots, but this is very rare.

In their initial flurry of enthusiasm, a lot of them used a spray and pray approach, and invested in lots of small startups. These were small ticket amounts, but most of these founders no longer communicate with them (unless they want to raise more money!)

Most angels have no idea what’s happening to most of their investments, because most founders are not disciplined about reporting results and providing updates. Angels don’t have the processes and systems so track their companies, and most give up in frustration in a few years.

Also, when angel investing was a new asset class, startups were founded by entrepreneurs who had big dreams, and valuations were realistic, which means it was possible to find good deals if you looked hard enough.

However, today, because of all the media hype around startups, it seems that every one and their uncle wants to start a startup. This means that most companies who pitch to angels are “me-too” clones – just minor variations on the same theme, which means it’s getting increasingly hard to find a founder you “fall in love” with. Also, angel investing seems to have become hot, as a result of which valuations are very stretched, and it’s hard to find founders who are realistic about how much their company should be valued at. Trying to negotiate with them can be frustrating, when they have completely unrealistic expectations, because they use the unicorns as a benchmark.

This is why the more mature, senior investors, who are looked up to in the angel community, are no longer actively investing in new startups. This has a knock on effect, because new angel investors will look to them for advice, and when they get negative reports, they will no longer want to explore this asset class.

Of course it’s true that a new sucker is born every minute, and there is now a new generation of investors who feel they missed out on investing in startups, and are willing to rush in where more experienced investors fear to tread.

In order to heal the ecosystem, it’s important that angels start documenting their experiences and sharing them, so that we can learn from their mistakes, and not repeat them again. It’s high time we all got back to reality, so that we can continue helping founders to start successful companies!