How do Kerala-based investors pick a startup for funding? Learn what these angels think
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In the world of aspirations called a startup ecosystem, there are two types of people; those in need of money to build their dreams and those who have a little extra wealth and the mind to risk it.
The magic called investment, leaving aside its size, happens when the two meet on common grounds where convincing is the key. In the Kerala ecosystem, where the spirit of nascent entrepreneurship has been picking up momentum in the past several years, courtesy of a renewed economic perception and institutional scaffolding, angel investing is fast emerging as a booming sector of wealth creation.
All around the world, angel investors. They put their mind into a company before deciding whether they should put their money into it or not. How do angel investors make the tough decisions? What are the factors they consider while dealing with a proposal? Leading angels from Kerala shed some light on their thought process.
The leaders of the Kerala Angel Network (KAN), the largest such group in Kerala, stressed the basics, including the importance of valuation, when they discussed the matter at Huddle Global Summit, a three-day conference organised by the Kerala Startup Mission (KSUM) last November in Thiruvananthapuram.
Raveendranath Kamath, president of KAN, said startups must conserve the actual funds needed for ensuring smooth scale up and take the right kind of debt. “Angel investors will help them in the initial stages. They have to attain lot of innovations and growth in terms of infrastructure and all aspects of life,” he added.
Roy I Varghese, KAN investor & Managing Partner, Roy Varghese Associates, said in the pre-revenue/revenue stage, startup founders need to look at valuation since, at that stage, they are going to concede a portion of their ownership.
Ajit Moopan, an active angel with KAN, opined that valuation is also connected to the self-esteem of founders. Founded in 2020, KAN has made investments in 24 companies, including 5 outside Kerala. The sectors in which its investors have invested include direct-to-customer (D2C), software as a service (SaaS), AI, HR-tech, and pharma.
KAN identifies itself as a sector-agnostic investment network as almost every other network does. KAN’s investment cheque sizes vary from Rs 50 lakh to Rs 4 crore. KAN selects companies for investment through a screening by a committee comprising experts in the fields such as marketing, finance and technology.
One of the major criteria the investors look into is a startup’s revenue potential. A company that makes at least Rs 5 lakh per month or has developed a minimum of one prototype of its product stands a good chance to win some investment, according to an investor in the network. They also assess how good a startup is in financial management; how much money a company makes and how much it spends.
Credibility of the founders and the team is something investors across networks keenly look into. It tops the list of the criteria suggested by Malabar Angel Network’s (MAN) P K Gopalakrishnan. Quality and domain expertise of the founding team, including their education, experience and integrity matter a lot, according to him.
He said it should be looked into whether a founder as well as the product are market-fit. The other areas he and his fellow investors assess include the innovativeness of an idea, the size of the potential market and exit opportunities. Exit opportunities for an angel include next-level investment, acquisition and initial public offering (IPO).
Shilen Sagunan, chairperson, MAN, echoed his colleague’s views. He said investors look into the skills of each member of the founding team of a startup scouting for funds. “A company is assessed based on today’s business model. However, a company should be able to change its model as per changing business atmosphere,” he said.
Shiraj Jacob, director of Phoenix Angels, said his network looks into specific sectors initially. “We look into sectors where the government spends are more like defence, solar energy, wind energy, water infrastructure.
“So companies which are proxy into these kind of sectors will be much interested. Our average cheque size is Rs 1 crore. And we invest in the very early stage of the company. But there should be some revenue traction in that business. And we look at the founders’ ability to run and scale the business,” he said.
Vinay James Kynadi, chairman & managing director of Venture Way Startup Ecosystem, said at the earliest stages of a startup founder’s competency is the most important factor he looks into. “The idea and everything else is secondary,” he said.
From his experience of dealing with startup founders looking for funds, he said: “You have two kinds of founders. There are some who have exceptionally brilliant ideas, but they are not able to articulate it and they're not able to visualize it.
“Lack of exposure and soft skills pose a problem, but there are some other founders who can probably exceptionally articulate it. They have clarity of vision, or at least are able to articulate their clarity of vision, but they might not necessarily be as great in execution. So we want both,” he said.
Santhosh Jose, venture partner of Konglo Ventures, shared similar concerns, saying startup founders need to master the skill of story-telling when they approach investors. “The better you get at that, the more you'll be able to convince people to believe in what you're selling,” he said. He said the saleability of a product is a mandatory criterion his platform has set for picking a startup for funding.
Startup Saturday is Onmanorama’s exclusive series featuring informative and inspiring stories from Kerala’s thriving startup ecosystem. The season 2 of the series will have stories exploring themes and trends from within the ecosystem, appearing on every alternate Saturday.
Read More: Find the first edition of the series where Onmanorama featured the stirring stories of 40 startups from Kerala showcasing the diversity of the ecosystem here.