Why does India need more Seed/Angel investors?

There has been quite a buzz on early stage investments in India with an increased number of Angel and Seed rounds as compared to last year (read this). While this is a great trend, Alok Mittal and Rahul Khanna, MDs, Canaan Partners, revealed at a media meeting, a slightly different story, which might see this trend wither away in the coming years.

Below are some excerpts from our conversation with Alok, on some analyses on entrepreneurs from various geographies, the distribution of investors in India and on how Indian startup actually go on to raise a Series A round.

Experience VS Alumni 

Canaan partners shared that they have restricted their investments to Tech Startups. Bangalore, Mumbai and Delhi, being the hotspots for tech entrepreneurs in India, served as geographies where Canaan made their first analysis -

• The concept of the "returnee" entrepreneur has been quantified, as 32% of funded ventures are run by entrepreneurs with over 3 years of international experience.
• 49% funded ventures are run by entrepreneurs have had corporate exposure. 
• A large percentage of funded Entrepreneurs from Bangalore and Mumbai have at 10 + years of experience. 
• A large percentage of funded entrepreneurs from Delhi and Mumbai are "blue chip" degree holders. 

Alok also shared that the "Bangalore ecosystem favored experience over educational pedigree, while Delhi founders were younger and were "blue chip" degree holders. When asked what Canaan Partners favor, Rahul Khanna said, "There isn't a set preference as such. Yes, a blue chip degree holder probably comes with some influence owing to his or her alma mater as well as a strong network, but if you look at our investment, Murugavel Janakiraman from BharatMatrimony started out full time with his venture because he got laid off from his corporate job. He also isn't from a premier institute. So it depends, really."

Angle/Seed VS Institutional funds - a huge discrepancy 

Many interviews that we've done in the past with ecosystem experts have lauded the entry of organized angel and seed funds across India. The data that Canaan partners shared with us also agrees with this trend -

But this growth isn't enough. Alok Mittal shared, "Since 2006, the number of Angel funds have increased more than four times, which is a good sign. But in reality, a mature startup ecosystem the bottom of the pyramid should be many multiples of the top part i.e., we need more seed and angel funds."

Why? Read on -

How many tech startups actually raise an Institutional round? 

This diagram says it all -

A minuscule percentage. Of all seed financed companies, 27% of companies raise the next round of funding. Of this number, 20% actually make it to a Series A round. Alok Mittal said, "We've been flayed a lot in the ecosystem for putting this out, but I think it is important to know the reality. What this means for an Angel investor is that if he invests in, say, four early stage companies, there is a small chance that they might get a 4x return on one company, which really doesn't move the needle by anything for them. We fear that this might discourage them from investing in early stage companies."

Accelerator programs constitute of a large portion of the seed financing components, and according to this diagram, they have a 27% success rate in making their startup's fundable. Effectiveness of these programs is difficult to measure as a lot of it dependent on the experience of the entrepreneurs of startups that they enroll. However, Alok Mittal is aligned to the general notion that the network that startup's get access to as a part of these programs is their biggest value add. He also added, "Also, a lot of the founders of these accelerator programs have been successful entrepreneurs and working with them also is a great value add for the startups."

Of the percentage of companies that fail, we asked the Canaan team how many of them actually go on to start up again. While they didn't have data with this regard, Alok Mittal did shared that this was a function of how fast the company failed. He says, "We've seen that the entrepreneurs who've failed fast still have the drive to start up again, but say someone who has failed at a startup which he/she spent a good few years working on, are lesser inclined to start up again."