“I saw an opportunity to achieve scale in the private market and to invest in ideas that aren’t accessible in public markets,” she says.
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Within months of Munjal’s venture into private markets, some directly and others through angel networks, Peak XV (earlier Sequoia Capital India) acquired a stake in the first startup she had added to her portfolio.
It was a company specialising in video intelligence. She was buoyant. Since then she has invested in 30 ventures, including the ride-sharing service BluSmart. While the majority of the companies she invested in, at various points of time, have done well, four startups have ceased operations and a few others are struggling with fundraising and finding the right product-market fit. “We have become more conservative,” says Munjal, who has pared down her investments from about 20 companies in 2021-22 to just 6 in 2023.
“Angels often take cues from VCs, who were more hesitant and non-committal last year,” she says.
Zuhaib Khan, a former entrepreneur and senior executive at an edtech firm, says the fear of missing out drove him to momentarily diverge from his investment motto in 2022. Attracted by the buzz around Web3, Khan decided to invest in a few startups in the sector.
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“Web3 was really heating up in 2022, with a lot of people showing interest, but there was uncertainty about its future direction,” he says. One of the Web3 companies Khan had invested in eventually shut down.Like Munjal, who has become reticent, and Khan, who has got singed, many Indian angel investors have become cautious in treading the startup world. Angels are focusing more on a startup’s execution rather than its potential.
This wariness is a massive reversal from a couple of years earlier when the high-risk, low-liquidity world of startups was a favoured investment arena for high net worth individuals (HNIs) and C-level executives. This was fuelled by shows like Shark Tank, a series of successful tech startup IPOs and a surge in fundraising activities.
Year 2021, often referred to as an outlier, saw the Indian startup ecosystem reaching new heights with a record number of unicorns, and companies securing multiple rounds of funding, leading to a doubling or even tripling of their valuations. To meet this growing interest, 40 new angel investment firms emerged in India in 2021 and 2022. They typically invest in seed and early-stage funding rounds in a startup’s lifecycle. The number of new angel networks fell to just six in 2023.
Things have, indeed, changed. AngelBay, an angel network with over 90 investments, has experienced a reversal from its peak capital deployment in 2021. Sorabh Agrawal, who cofounded the network in 2015, says, “In 2021, we were involved in 4% of deals presented to us. Now, that has dropped to less than 1%.” He reflects on the investors who entered in 2021 and have seen no material improvement or just lacklustre growth in their portfolios.
“This has dampened enthusiasm for this asset class, especially when compared with the more lucrative and liquid listed space, which has been on a high,” he says, pointing to a reduction in investor participation in the startup sector in the last 15 months.
This is not just an Indian phenomenon. According to Crunchbase, globally, early-stage startup funding was down by more than 40% in 2023, year-on-year.
Industry watchers say angel investors who came in recently were “very upbeat” about a single asset class and may have over deployed.
Angel investors’ returns largely depend on secondary exits that are tied to growth rounds. Raghav Kanoria of Anchor Group highlights this change: “Earlier, VCs followed angels quickly, offering lucrative exits. Let’s say, 12 to 18 months after angel investors came in, they got 4-5x returns in the second round itself.” 2023 marked a significant shift in the investment landscape with late-stage funding plummeting by 73%, year-on-year, in India, according to Tracxn. This impacted the returns of angel investors, prompting a reevaluation of investment strategies.
Dhruv Sharma, CEO of AngelList India, a venture infrastructure platform, agrees that the time taken to close follow-on funding rounds in early-stage startups has gone up. “In 2021-22, for companies that were aggressive in fundraising, the median time between pre-seed and seed rounds was 11 months, and the time between seed and Series A rounds was 10 months.
Back then, it was possible for a rapidly growing company to go from seed to Series B in just over a year,” says Sharma. An analyst says the time taken for successive rounds has now gone up to about 18 months, even for seed-to-Series A funding.
The US startup ecosystem, the world’s largest, has also experienced a similar shift with the time to close “the graduation rate to Series A” being “way below historical norms”, says a Wall Street Journal report.
New reality
Adapting to this new reality, experienced angels in India are keeping a check on the size of their cheques and are closely scrutinising deals. Their focus has shifted from breathtaking concepts to solid business models.
Apoorva Sharma of Venture Catalysts & 9Unicorns says, “The investment criteria have evolved. Now, the emphasis is on startups demonstrating tangible innovation and a clear path to profitability.”
The shift in angel investors’ concerns has also been prompted by governance lapses at startups, including unicorns. In 2022, major upheavals at companies like Zilingo, Trell and
BharatPe highlighted issues in corporate governance. This persisted in 2023, with GoMechanic, Broker Network and Mojocare getting embroiled in controversies.
“There was a significant loss to angel investors when some companies died. Double-digit multiple returns suddenly fell to zero,” says Apoorva Sharma. This led to his network prioritising the need for self-governance in its portfolio of early-stage startups.
Nandini Mansinghka, who leads Mumbai Angels, a network of about 1,500 angel investors, says the early-stage ecosystem in India is entering the next phase. “What has changed is that everybody is looking more carefully at risk in terms of due diligence and founder intent after high-profile meltdowns,” she says.
Sharma and Mansinghka say the total capital they deployed in 2023 was consistent with that in previous years and new investors continue to join their networks. However, an industry executive says that although new angels are entering the fray, 80-85% of them in large networks are dormant.
After a year of recalibration and introspection in India’s startup ecosystem, the future holds cautious optimism. The state of dormancy is likely to reverse in the upcoming quarters, says Munjal, who adds that multiple seed-stage deals are in the works and that VCs are becoming active again, with artificial intelligence and climate tech emerging as hot sectors.
As the cycle shifts, seasoned investors have a message for new entrants: don’t expect outlandish returns in the short term. They underline the old adage—only invest what you are willing to lose.
