The Indian Angel Network (IAN), an angel investing group comprised of successful entrepreneurs and business executives, recently announced the first close of its second fund, IAN Alpha Fund, at ₹355 crore or around $44 million. This analysis explains the news and its implications for retail and institutional investors in India.
Analysis of this news for a layman
IAN is a group of wealthy, experienced investors who provide funding and mentorship to early-stage startups in exchange for equity ownership. Their new $44 million IAN Alpha Fund will invest in many startups across areas like financial technology, healthcare, manufacturing, and more. This is part of IAN’s broader mission to invest in over 500 startups and create 5 million jobs in India by 2030.
This is a positive development for India’s startup and venture capital ecosystem. IAN has an impressive track record, having invested in over 200 startups through its first fund launched in 2017, including three that went on to achieve unicorn status valuations over $1 billion (Spinny, Druva, Uniphore).
Having a large, dedicated pool of funding from seasoned investors gives startups immense benefits beyond just capital. IAN’s members provide mentorship on business strategy, make introductions to corporate partners, and lend their entrepreneurial expertise – invaluable resources for fledgling founders.
On a macro level, this funding will lead to job creation, innovation, and economic growth if even a fraction of the 500 targeted startups succeed. With ample access to risk capital, more Indians may be encouraged to start companies in high-potential industries like SaaS, healthcare tech, fintech instead of traditional options. This aligns with the Indian government’s broader push towards startup infrastructure policies like Startup India.
However, there are risks if startups do not generate returns commensurate to the investments. Venture capital in India remains relatively nascent, and market dynamics may not yet justify such large capital pools. Government policies and regulations also have an enormous influence on startup successes and failures.
Impact on Retail Investors
This news does not directly allow retail or public market investors to partake in the IAN Alpha Fund, since venture capital funds have traditionally only been accessible to institutional investors or ultra high net worth individuals.
However, the downstream effects of more startups receiving funding and potentially getting acquired or going public does present retail investors some opportunities. Indian retail investors in particular have shown appetite to invest in domestic tech and startup IPOs in recent years. So if even a small portion of these 500 funded startups eventually list on public markets after multiple rounds of venture funding, retail investors would have the chance to benefit from any upside.
Additionally, more startups scaling up would get acquired by large corporations, so retail investors in those public acquirer companies can indirectly gain upside. For example, if a payment startup gets funded further by IAN Alpha, receives millions of users, and gets bought by a large Indian bank like ICICI Bank or HDFC Bank, shareholders of those banks benefit.
So in summary, while retail investors cannot directly participate in the IAN Alpha Fund, they can look to gain exposure to the startup and tech ecosystem growth in public markets by selecting potential acquirers or IPO candidates.
Impact on Industries
The infusion of nearly $44 million into 500 startups across sectors like fintech, healthtech, manufacturing, and more can massively disrupt these industries. Incumbents will face competition, new innovative products and services will get created, while some existing companies even get acquired by this new breed of startups.
Fintech stands to be disrupted the most, as lending, payments, and wealth management are ripe for a digital overhaul still in early stages in India. Startups bringing advanced analytics, AI/ML algorithms to credit underwriting can expand lending access. Digital payments against India’s cash economy has vast room for growth, while robo-advisory and micro-investing platforms can democratize wealth management.
Healthcare, especially telemedicine and predictive diagnosis through AI, is already seeing major digital transformation. IAN’s portfolio has healthtech unicorns like Onco. So more funding can spur innovation benefiting patients with better access, costs, and outcomes. Medical record digitization and remote patient monitoring also have immense potential.
Manufacturing and supply chains can gain enormously by implementing advanced technologies like IoT sensors, robotics, 3D printing. This enables mass customization, predictive maintenance, and optimized production – the hallmarks of Industry 4.0. Government programs like Make in India would get a fillip to become globally competitive.
Long Term Benefits & Negatives
If even a reasonable minority of the 500 funded startups succeed over the long-term, this investment by IAN Alpha Fund can massively reshape industries, enable Indian entrepreneurs to build global products from India for the world across sectors like fintech, healthtech, and manufacturing. And this would significantly boost job creation over time.
However, there is certainly risk that despite getting ample capital and resources, many startups fail due to lack of product-market fit, wrong business model, competition or regulatory hurdles like data privacy. High startup failure rates would lead to capital destruction and prevent recouping investors’ money.
Also, hiring employees by the thousands and then laying off or shutting down would have a disproportionately negative societal impact. Average job tenures may become shorter as employees embrace the startup culture but get impacted by turmoil.
From a macro perspective, over-funding startups too soon or sustained cash burn by founders to gain scale can create a temporary bubble without true justification from fundamentals. Ultimately profitability and real unit economics matter.
So while optimism should be balanced by some caution, this investment is a positive indicator of the thriving entrepreneurial ecosystem backed by risk capital to power innovation and job growth.
Short Term Benefits & Negatives
In the short run, this $44 million fund makes growth capital available quickly to deserving startups meeting their investment criteria to build and scale their ideas. This is extremely beneficial for those specific entrepreneurs who gain a few years runway to prove product-market fit, get new customers, and reach new milestones before raising the next round.
For the venture capital industry, such a large dedicated fund signals positive sentiment to put more money into Indian startups. This can have a demonstration effect leading more successful founders and corporates to turn investors and limited partners.
However, in the short term, negative outcomes are also very plausible until milestones get achieved. Many startups fail prematurely, leading tocerning unemployment, loss of investor capital, and inability to deliver services expected by early customers.
There could be cash burn mismanagement or exuberant overhiring by founders in a rush to scale, leading to sudden layoffs months later. Market demand may also not materialize on expected lines.
So investors like IAN and their portfolio startups should temper short term optimism with disciplined milestone-based funding to avoid these downside risks in the 1-3 year horizon before growth gets proven out. Patience and fundamentals matter more than hype and herd mentalities.
Companies will gain from this
Here are some publicly listed companies that could gain from more startups getting funded across sectors like fintech, software/SaaS, healthtech, etc:
- Infosys (INFY) – India’s iconic software consulting firm can see upside from all the enterprise tech, cloud solutions, and digital transformation projects it can undertake for both the funded B2B startups as well as traditional businesses trying to revamp systems.
- Reliance Industries (RELIANCE) – Its Jio Platforms business already has massive telecom and digital infrastructure that a new generation of app and internet companies leverage to scale in India. Funded startups will boost its subscriber base.
- Tata Consultancy Services (TCS) – Similar to Infosys, TCS can gain projects by having cutting-edge offerings around digital transformation, cloud migrations and implementing next-gen enterprise IT architectures.
- HDFC Bank (HDB) – Leading Indian private sector bank which has been progressive in its digital banking initiatives can potentially partner with various fintech firms to expand consumer and SME offerings.
- AXIS Bank (AXISBANK) – Competes with HDFC Bank in digital banking services, so can also gain from partnering with emerging fintech startups in payments, neo-banking, lending and online brokerage.
The common theme is that public companies with proprietary capabilities around building software, apps and digital infrastructure are poised to be vendors, partners, and collaborators in order to scale up this new breed of startups.
Companies which will lose from this
Incumbents and legacy businesses that have resisted change or been slow to innovate will face existential threats as funded startups rapidly encroach on their turf bringing modern, agile digital solutions. Some examples across industries:
- Public sector banks – Already losing share to private banks, government-owned banks like SBI, PNB face more pressures in lending and payments services as nimble fintech players take advantage of antiquated systems.
- Brick & mortar retailers – Already reeling from commerce giants like Amazon and Flipkart/Walmart, traditional big box retailers will find it harder to retain consumer mindshare as more well-funded D2C brands and online merchants chip away.
- Telecom operators – Jio’s success has weighed heavily on incumbents Airtel and VIdea. Emerging startups trying to build India’s super app could leverage UPI to further disintermediate traditional telecom access and messaging fees.
- Inpatient hospitals – Startups focused on telemedicine, AI-based diagnostics and outpatient services can hurt large listed hospitals by reducing admissions and average length of inpatient stays as more healthcare goes remote. Their costly infrastructure gets underutilized.
- Higher education – Ed tech startups expanding access to high quality education at significantly lower costs using models like BYJU’S, upGrad, etc can adversely impact demand and pricing power of brick & mortar colleges.
The core lesson for incumbents is that founders with vision and access to risk capital can successfully disrupt entrenched legacy businesses through innovative use of technology. So continual revamping of products, channels and business models are mandatory.
If even 10% of 500 funded startups successfully exit via IPO or M&A over 10 years, it can produce dozens of newly listed companies bringing tremendous shareholder value while massively advancing the Indian economy and job market. However, adequate checks and balances should govern investor capital flows into startups to ensure rational exuberance tempered by fundamentals. India’s startup ecosystem remains nascent but bursting with potential as evidenced by 100+ unicorns minted recently. Government policies like Ease of Doing Business rankings, legal frameworks regulating international capital flows, and talent immigration laws play pivotal roles in turning India into a global innovation hub and attractive market for investors.
The IAN Alpha Fund raising $44 million is a welcome boost to India’s startup funding ecosystem and overall economic priorities like job creation and financial inclusion. Retail investors also stand to benefit indirectly if funded startups eventually list publicly after scaling up, or get acquired by larger public companies. However, disciplined execution balancing opportunity and risks are vital to ensure capital gets allocated judiciously between founders and investors. If effective checks and balances govern stakeholder incentives and transparency, this investment momentum can sustainably advance India’s entrepreneurship and innovation environment.
Citation: ET Bureau. “Indian Angel Network (IAN) on Monday said that it has made a first close of its second fund IAN Alpha Fund, at ₹355 crore.” The Economic Times