Angel Investing — Success or Failure ? Devil is in the (depressing) details
A few days back, as part of a group of angel investor friends; I got an opportunity to study the prospects of angel investing. This was being touted as a very attractive investing option, notwithstanding the controversy of angel investing tax in India. However, our research revealed that in spite of many rosy scenarios being painted of angel investments, one needs to dig deep to discover the devil in the (often depressing) details. The data points below are realistic but pretty depressing. All Indian data is on a pre-tax basis. So, the impact of angel tax if any will be further negative.
David S. Rose, Founder and CEO, Gust has been described as “the Father of Angel Investing in New York” by Crain’s New York Business, & a “world conquering entrepreneur” by BusinessWeek. He is a serial entrepreneur & Inc 500 CEO who chairs New York Angels, one of the most active angel investment groups . His verdict is “3 profitable exits out of 100 based on my personal investments in over 100 companies, New York Angels’ involvement in several hundred others and nearly two decades of familiarity with active angel investors”.
As per Apoorv Ranjan Sharma, co-founder of startup incubation platform Venture Catalysts; “Ratio of Indian startups getting Series A Funding as compared to US/ Chinese startups is 60%.” Hence, all US funding success hit ratios could be discounted by 60% for the Indian scenario. So, the 3 profitable exits out of 100 as mentioned above for the US context could become 2 in the Indian scenario.
Letsventure Survey of 200 Indian Angel Investors 2018 puts out the following statistics :
Angel investment portfolio companies who get follow-on funding : 20%
Angel investment portfolio companies who get exits : 7%
Average Exit Amount :100% of the principal invested.
Maximum Exit Amount : 300% of the principal invested.
IIT Madras India Venture Capital & Private Equity Report 2018 says that only 8% of 2381 Venture Capital (VC) & Private Equity (PE) companies in India received the 3rd round of funding
Inc Magazine says that “96% of businesses fail within 10 years”.
As per K. Vaitheeswaran, Founder of India’s 1st E-commerce company Fabmart (Indiaplaza); 95% of startups will fail”.
IBM Study of Indian startup ecosystem says that ” 90% of startups will fail”.
As per the Ahmedabad based EDI Global Entrepreneurship GEM 2016–17 Report, “India has highest business discontinuation rate of 26.4% in the world”.
Rajan Anandan , MD Google India & Angel Investor says “70% of business ventures will die”.
Andy Rachleff, President & CEO, Wealthfront & Stanford Graduate School of Business Professor, a 25 year Venture Capital veteran reveals that “Angel Investors don’t make money. 3% of Venture Capital firms generate 95% of the total industry returns.”
Other parameters to consider besides the above :
If one considers IPO (Initial Public Offer) listing as a success, then the ratio of Number of private listed companies in India (6000 +) to the total number of companies (1.1 Million plus) is only 0.6%.
If one considers brand recognition as a success, then the ratio of number of known brands in India (500) as compared to the total number of businesses (10 Million Goods & Services Tax (GST) registered ) is only 0.05%
We could go on and on with the above depressing metrics. The point is not whether the hit rate is 1 out of 100 or whether 1 out of 1000 businesses are successful. The point is how to strive to make the organizations where one has an interest in making them as globally successful as possible.
Experienced business entrepreneurs are well aware that striving to make a business successful is a thankless 24 x 365 job.
I call it running the marathon at the speed of a 100 meters race consistently.
Unfortunately, it is also not about business acumen. It is also about luck. An entrepreneur usually fights forces which are outside his or her control.
In conclusion, angel investing based on statistics presents a pretty dismal scenario. So, the next time someone convinces you to be an angel, do play the devil’s advocate and dig deeper into the data and convince yourself.
Happy angel investing & best of luck. (You as an angel will need all the devil’s luck).
Question : If I am seeking angel investment, what should I do ?
Answer : Find a customer willing to pay for your product or service. Paying customers are the best angels.
PS : The same advice also applies to angel investors. The best way you can help an angel investee company besides giving money is to use their products and services and give them valuable feedback and advice on the same.