Venture capital funds with deep pockets set off alarm bells for India’s angel investors

NEW DELHI: Venture capital funds armed with deep pockets are muscling into the territory of angel investors as they pick up stakes in very young startups to gain a lead in India’s fast growing entrepreneurial sector.
These funds, which typically do not invest in companies that have neither a product or revenue, are now launching angel investment programmes and writing small cheques based on just an idea. This has set off alarm bells in India’s angel investment community that is struggling to keep pace with these cash rich competitors.

“It’s a cause of concern for angel funds like us as a competitive offer from a venture fund comes up in review meetings every two weeks,” said Karthik Reddy, chief executive officer of Blume Ventures which has backed startups such as mobile technology maker Apalya and hiring portal Babajobs. Blume typically invests up to $300,000 in a startup, termed as seed capital and works closely with the company for further fund raising.

Investors like Blume have to now compete with several marquee funds including SAIF Partners, Nexus Venture Partners, Matrix Partners, Sequoia Capital and Accel Partners, all of which have opened seed gel investing programs to net fledgling startups.

So far this year over $1 billion of venture capital has been invested in Indian startups according to consultancy EY. “Seed investing by VC firms is a new phenomenon. They have realised they will lose out on ‘good’ deals and valuations if they are not present in the game early on,” said Manish Singhal, angel investor in startups such as AdPushup and advisor to firms such as ApartmentAdda.

Singhal was formerly associated with Lets Venture, which chose to take venture money of about Rs 4 crore from Accel Partners led by a syndicate of angels. For entrepreneurs this growing trend is throwing up a problem of plenty.

A Mumbai based founder and CEO was looking to raise money for his startup, a couple of months ago and had offers from both seed funds and larger venture investors.

This month, he decided to take an Rs 5 crore cheque from angels and politely asked venture funds to wait and invest in a later round. "The problem of plenty is good to have but a startup can be badly stuck if it fails to raise next round from his own venture fund," said the CEO on condition of anonymity.
“It’s a double edged sword. If you are confident of doing well and scaling up - global VCs can make important connects overseas for which angels might not have the bandwidth,” said Kushal Dugar, CEO of Teabox which was seed-funded this year with $1 million by Accel Partners, one of the earliest investors in Flipkart. Dugar is now looking to raise another round in which Accel Partners will participate.

But when a venture fund does not provide follow-on funding for a startup it has backed at the seed stage, it can lead to a fund crunch for the company. “Startups require a lot of hand holding and mentoring in early months. Venture fund (do not have) a dedicated arm for that,” said Harshad Lahoti, founding partner of ah! Ventures, a dealmaking platform for early stage startups.

However VCs have realised that its best to co-investing with angels as that can improve their funnel for long term. “We are collaborating closely with our companies from day one, which makes us a recommendable partner for angel investors,” said Rehan Yar Khan, earlier an angel and now founder of VC firm Orios Venture Partners. “VC firms at seed stage and angel investors both fulfill different needs of the entrepreneurs,” said Khan, an investor in startups such as Druva, OlaCabs and Unbxd.