Where Early Stage Investments in India stand today…
USD 714 Mn have been invested in the early stage startups in India between 2016 and 2018 alone. And yet, the market seems fragmented with many structural flaws in the system. One of the key challenges that startups face today is the presence of multiple individual investors on the cap table and the time required from the founders to manage all of them.
“For any document that needs a signature of every investor, I have to spend almost 1-2 weeks in follow-ups. At the time of our Series A round, there was an exit opportunity given to some of the existing investors and some of them came onboard right away while some were not interested. The whole process took us around 1 – 1.5 months. In cases where investors need to secure a FIRC from the RBI, only 4 of my 18 investors have been able to secure it and I am still following up for the remaining 14 investors.” – Rajat Garg, Co-Founder of MyUpchar.
Another major challenge seen today is with the business and financial reporting of companies. Startup Reporting, for a long time, has been broken in the early stage ecosystem with no regulations in place. Due to this fragmented nature of reporting, some startups have shut down without a proper warning to their investors, which could have been avoided with a body responsible for reporting.
“If there is one entity that internally manages all of it, that will be a huge time saver for founders like me”, Rajat adds.
Challenges being faced
- Founders spend most of their time fundraising and following up with investors. Typically there are about 10-20 investors in an early stage round and different rights expectations from each of them.
- Cost for fundraise
- Startups as an asset class is still difficult to access, invest and diversify. The minimum cheque size on LV was 5 Lakhs, making the asset class accessible to a limited number of investors who are willing to pay this much.
- Limited incentive as a Lead Investor / Investment director to be an anchor for the deal and support the startup throughout its journey.
How is this changing now with an Angel AIF?
SEBI has recently launched a new category of Alternative Investments Fund (under Cat-1) which supports discretionary investments for angel investors. This vehicle is different from where an angel is an LP into a traditional fund. In a traditional AIF, investors typically need to invest a capital of INR 25L to 1Cr and cannot choose the startup they want to invest into. Unlike the traditional fund, through the Angel AIF investors can now be a part of a scheme of the Fund that sits on the cap-table and hold a stake in the companies they invest in through units in the AIF.
The AIF will allow angel investors to express an intent to commit a minimum of INR 25L over 5 years. In simple terms, it means that an angel investor can allocate broadly 5L to the startup asset class every year, for the next 5 years. Having said that, there is no pre-scheduled drawdown – they will be required to keep the allocation over the next 5 years and can distribute as they decide to commit. Once the commits are made, the investment goes through a scheme in the AIF and they will hold units in the scheme and thus indirectly hold a stake in the startup.
This can resolve a lot of issues faced by Founders and Investors today. Given that there is only one entity sitting on the cap-table, founders will find it easier to manage their investors and close the fundraise.
Since all the investments will be going through a scheme, Investors can also invest as small amount as INR 1 Lakh into a startup. This will enable the investors to diversify their portfolio further and thus open up this startup asset class to many new investors.
LetsVenture Launches LV Angel Fund
LetsVenture now has a registered Angel AIF approved by SEBI. As an investor on the platform, and a member of the AIF, investors can continue to log in and engage with the startups.
In an angel investing cycle, it takes around 48 months for a startup to mature up to Series B stage. LetsVenture has now started seeing its portfolio companies mature up to that level, delivering an IRR of 34% for 2014 portfolio and has delivered 5+ >5x returns and 3 >10X returns. In the last 5 years, we have enabled investments worth INR 450 Cr in the early stage startups. Through LV Angel Fund, we believe that the number can go up to INR 1000 Cr.
Benefits to LetsVenture Founders
- Startups would now have a single entity on their cap-table instead of multiple individual investors as different entities. This means – less paperwork, faster closure of fundraising, less number of follow-ups.
- With a lesser number of entities on the cap-table, follow-on rounds with VCs become much easier as VCs don’t have to deal with each individual Angel Investor.
- Under this new model, Angel Tax for startup founders has been removed.
- Quarterly Reporting for startups will now be streamlined as it will happen through the LV Angel Fund.
Benefits to LetsVenture Investors
- Since LV Angel Fund is the primary investor on the cap-table, LetsVenture will actively work on next round negotiations to maintain rights for all the investors.
- Each Portfolio company gets support from LetsGrow (an LV platform for startups to raise their Series A) – where we will work with the companies for their follow-on round.
- Investors get regular reporting every quarter and valuations for their portfolio every year.
LetsVenture Lead Investors are also going to get the benefit of Angel AIF. The lead works with the portfolio company, by being on the Board, to help them grow/scale as well as monitor corporate governance. Under the AIF, it will be easier to incentivize the lead investors by providing them with a carry option. This will make them entitled to a percentage of profit the other investors make at the time of their exit.
“At LetsVenture, we have always believed that as a partner in Angel Investing, it is our responsibility to take care of investors’ interests and make the process of commitment, monitoring and exit management easy and efficient. This new vehicle will empower the investors to diversify their portfolio better as well as take away a lot of burden from the founders as now the fund will do the reporting and coordination with investors.” – Shanti Mohan, Co-Founder of LetsVenture
As always, we are available to answer questions and discuss this with you. Towards making Angel Investing Easy, Efficient and now faster!
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