How Venture Catalyst is turning HNIs even in smaller towns and cities into angel investors

High net worth individuals from smaller cities are becoming the backbone of angel investment. Out of Rs 177.45 crore invested by Venture Catalyst, India’s biggest earlystage startup investment fund with 33 deals last year, Rs 110 crore came from them. The figure last year stood at a paltry Rs 15 crore.
The earlier wave of angels was mostly MNC CEOs and COOs and owners of established organisations and confined mostly to the IT industry. Today, an overwhelmingly large proportion of startups belong to non-IT sectors such as logistics, communications, healthcare, food and travel — and a new class of angels is taking wings.

Manish Agarwal — like Infosys cofounder Kris Gopalakrishnan, Google vice-president Rajan Anandan or Tata Sons chairman emeritus Ratan Tata — is a regulation HNI with risk appetite for new asset classes, patience of a dead elephant and placing multiple bets. Except that he is based in Raipur. He is one of the promoters of Nandan Steels and Power Limited in the Chhattisharh capital and has put his money in 18 startups as an angel. What differentiates Agarwal is his interest in off-centre locations for his enterprises.



“The rich from non-metro cities like Raipur prefer angel investments as a new asset class as it has dynamic market opportunity and investor relevance,” says Agarwal, director of finance at the steel company with over Rs 1,500 crore revenue. At times bootstrapping isn’t a viable option and traditional lenders don’t take much interest in new-age companies. “Angels have to pitch in,” says Agarwal, who invested in coworking startup Inov8 and personal hygiene brand PeeSafe.

“The rising trend of HNIs becoming angel investors essentially points to the maturity of the startup ecosystem,” says Apoorv Ranjan Sharma, cofounder of Venture Catalysts. The number of HNIs has been growing in tier II and tier III cities, with groups of investors creating their own city-specific angel networks. For such investors, says Sharma, angel investment is the preferred way to flush high disposable income. It has moved up the asset class to become the highest risk and reward avenue with big returns.



“Enhanced involvement of HNI, even from small towns and cities, has fundamentally democratised the angel investment ecosystem,” he says, adding that out of 588 people who invested through Venture Catalyst last year, 78% were HNIs.

PE & VC Route
The trend is likely to gather steam over the next few years. From 62,000 ultra high net worth households (ultra HNHs, or those with a net worth of Rs 25 crore or more, according to Kotak Wealth Management) in 2010-11, the number is likely to reach a little under three lakh with a combined net worth of Rs 319 lakh crore by 2020-21. Though 55% of ultra HNHs are estimated to be from the four metros of Mumbai, Delhi, Chennai and Kolkata, 23% would come from cities like Raipur, Jamshedpur and Jaipur, according to a study titled “Top of the Pyramid 2016” by Kotak Wealth Management.





The rise in the number of super-rich is accompanied by a spike in investment by the group in alternative assets besides equity, debt and real estate: from 4% in FY2013 to 11% in FY2016. The ultra HNIs, points out the Kotak report, are also increasingly taking PE and VC route to invest. HNIs also offer a greater degree of flexibility to entrepreneurs. Their overall portfolio distribution offsets the chance of making losses, while providing essential financial support to startups belonging to diverse industries.

Angel investing too has undergone tectonic changes over the last few years: from handholding without expectations by entrepreneurs-turned angels to a returns-oriented one by the new-age professional angels who are driven by research data, statistics and estimates. Currently, there are 700-1,000 seasoned angel investors in India, almost entirely from tier-I cities, claims Sharma. Their net worth and capacity to invest would be close to around $1 billion annually. The US sees investment of $25 billion annually, and given India’s size and the importance of startups, it needs a similar quantum of annual investment.



Seasoned angels don’t have the wherewithal to provide $25 billion annually. “Therefore, we reached out to HNIs, particularly in tier II and tier III cities,” says Sharma. “They represent an untapped resource of great potential.” HNIs have also replaced entrepreneursturned-angels who invest to support the next generation of entrepreneurs. During the heavy VC investment phase of 2015, a lot of secondaries (where entrepreneurs get to sell their shares) also started in a big way. “This gave equity-rich, cash-poor entrepreneurs a lot of capital to invest and resulted in wave of angel investments,” says Amit Somani, managing partner, Prime Ventures.

However, with the maturing of startup ecosystem, entrepreneurs have gone back to their core focus. This has possibly led to a slowdown in direct angel investments by entrepreneurs, says Somani. Another reason for HNIs to turn focus on startups is the fact that the Indian equity market has been on a tear. “Financial upside is a fantastic side benefit but can’t be the primary reason to invest,” says Somani, and angels who thrive will be the ones who are keen to learn about the new age economy, invest in sectors they understand or new ones that they want to learn about and, therefore, have a broader perspective than a single-minded focus on returns.



Business Fundamentals
Though there are a couple of dozen serious, professional angel investors among entrepreneurs as well as HNIs, Somani reckons these are people who have figured out their strategy to invest, areas that they like or dislike, and what would be the unique selling proposition for the best entrepreneurs. “Many angels and VCs have also started to co-invest much earlier than before.”

It’s not only Venture Catalysts that’s betting big on HNIs. Take, for instance, early-stage investor fund YourNest, which has over 180 HNI investors. “Last year, a number of investment rounds in our portfolio companies were led by HNIs,” says Sunil K Goyal, founder of YourNest Venture Capital. HNIs prefer to stay behind the scene. Over the next few years, they will become active in the secondary market by buying out the portfolio of VC funds and holding them in perpetuity without exit pressures. There are doubts, though, if these new set of angels are investing without understanding business fundamentals.

“This is a concerning trend. It has become more of a herd mentality,” says Jitendra Gupta, managing director of PayU India. “It is quite similar what happened between 2003 and 2007 when investors perceived real estate as a quick way of making supernormal profits. The present trend, says Gupta, has more to do with the hype about valuations of unicorns such as Flipkart, Ola and Paytm. Gupta, who has invested in a dozen companies over the last three years, says he has one mantra: familiarity with the entrepreneurs he is investing in. “Either I have known the team from before or team has had solid domain experience. This has worked well for me.”


Though over 90% of startups are doomed to fail, it has not deterred first-time HNI investors. Gaurav V Singhi, a chartered accountant in Surat, believes in the big picture. “There is a huge opportunity in investing in startups,” says Singhi, who has invested in 22 startups as an angel. “Risk is part of any investment. So startups should not be singled out,” he says, adding that rewards outweigh the risk multiple times.

The biggest challenge for earlystage venture funds, says Sharma of Venture Catalysts, is not the risk but acute lack of awareness among the super rich in smaller towns and cities about the opportunity to turn angel. “India can’t claim to have the tag of a ‘startup nation’ as long as it remains confined to top cities.”