India Venture Capital and Private Equity Report 2012

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1 India Venture Capital and Private Equity Report 2012 Stimulus for the new and the nascent Incubation support and angel funding for start-ups Thillai Rajan A. Ankit Jain

2 Past Reports Past Report Releases Prof. Idichandy, Deputy Director, IIT Madras releases the report in the presence of Gopal Srinivasan, Chairman & M.D, TVS Capital Funds Limited Prof. M.S. Ananth, Director, IIT Madras releases the report in the presence of Arun Jain, Chairman & CEO, Polaris Software Prof. Bhaskar Ramamurthi, Director IIT Madras releases the report in the presence of J.P. Nayak, former President, L&T; A. Ramakrishna, former President, L&T; S. Prakash, COO, IL&FS water group

3 India Venture Capital and Private Equity Report 2012 Stimulus for the New and the Nascent Incubation support and angel funding for start-ups Thillai Rajan A. Ankit Jain Department of Management Studies Indian Institute of Technology Madras Chennai India

4 The India Venture Capital and Private Equity Report is an annual report published by the Indian Institute of Technology Madras from Previous reports 2009: On top of the world, still miles to go 2010: The contours of smart capital 2011: Fueling growth and economic development Support from the following sources for the preparation of this report is gratefully acknowledged. DEPARTMENT OF MANAGEMENT STUDIES, INDIAN INSTITUTE OF TECHNOLOGY MADRAS

5 Preface We are happy to present this fourth annual report on the Indian Venture Capital and Private Equity (VCPE) industry. It is quite gratifying to note that the annual report series, which was started as a pilot initiative in 2009, has been received extremely well. The requests for the past three annual reports have come from all corners of the globe. We were encouraged by the strong response to our efforts, which in a way confirmed our conviction that there is a need for a publication of this nature to get a holistic perspective of the different segments of the Indian VCPE industry. The main focus of this report is on incubation support and angel investments. In the last three reports, the focus was either on investments in the growth and late stages of the company life cycle or on sectors that were relatively mature, such as infrastructure and real estate. However, in the last few years, there has been an overall recognition that availability of seed stage financing and other forms of business support services to start-ups should be considerably strengthened to sustain the growth in entrepreneurship. The government has formulated various incubation support schemes to encourage and support innovative start-ups. In the private sector, there has been an emergence of angel investor networks consisting of members keen on investing in the innovative ideas and capabilities of entrepreneurs. Despite the solid growth in these forms of support, our knowledge on the trends and impact of these two segments is very limited. Reports that track VCPE investments do not include incubation and angel investments in their summative analysis for various reasons. We feel that such early forms of support are very important to sustain the investment growth in VCPE as they act as deal sources for growth and late stage investment funds. These two reasons formed the basis of our motivation to study these two segments for this years' report. With university campuses in India emerging as centers of entrepreneurship, we feel that the findings of this report can be valuable signposts to young innovators in their entrepreneurial journey. We thank all those who have constantly encouraged and urged to continue our efforts. Specifically, we would like to acknowledge the support from Prof. G. Srinivasan, Head, Department of Management Studies; Prof. R. Nagarajan, Dean, International and Alumni Relations; and Prof. L. S. Ganesh, Professor in charge, C-TIDES. We would also like to thank all the faculty members of the Department of Management Studies for their constant support and encouragement. We also recognize the research support from Keerthana, Bharat Bansal, and Anand Bharathy. The MILS student team took care of the production of this report and all the logistics in connection with the release function. We gratefully acknowledge the financial support received from IIT Madras and the Indian Council for Social Sciences Research (ICSSR) for this study and the preparation of this report. For the first time in the series, this report features contributions from industry practitioners. We are grateful to Ajai Chowdhry, Deepam Mishra, Padmaja Ruparel, and Anil Joshi for their efforts in contributing to this report. Lastly, we are grateful to information service providers such as DealCurry and Venture Intelligence for giving us access to their resources without which a study of this nature would not have been possible. Thillai Rajan A. Ankit Jain (i)

6 Table of Contents Prefac e Table o f Contents List o f Tables List o f Figures (i) (ii) (v) (vii) SECTION A: THE INDIA VENTURE CAPITAL AND PRIVATE EQUITY REPORT SERIES 1.0 Overview VCPE Rep ort 2009: On top of the world, still miles to go VCPE Rep ort 2010: Th e contours of smart capital VCPE Rep ort 2011: Fu eling growth and economic development 3 SECTION B: INCUBATION 2.0 Incubation support in India Overview of bu siness incubation Accessin g in cubation support Incub ation support vis-à-vis VC support Incub ation support schemes in India Innovation in incu bation support Description and sources of data Description of data Description of variables Sources of data Analysis of incubation support Location of incub ation facilities Focus of incub ators Financial support to the incubating facilities Typ e of incubators Su mmary 32 (ii)

7 5.0 Analysis of Incubatees Overview of incu bation facilities Growth in nu mb er of incubatees Location of incub atees Focus of incub atees Graduation of in cubatees Su mmary 40 SECTION C: ANGEL INVESTMENTS 6.0 Overview of angel investment process Introd uction Characteristics of an gel investments Th e fund ing process Evolution of angel financing in India Regu lation an d govern ment incentives Analysis of angel investments Description of data Trend s in angel in vestments Profile of an gel investors Su mmary 60 SECTION D: DIRECT GOVERNMENT INVESTMENT IN EARLY STAGE COMPANIES 8.0 Overview of direct government investments Description of schemes Description of data Description of variables Trend s in direct government investments in start-up businesses Profile of direct government investment schemes Salient featu res of projects and investment pattern Su mmary Outlook 81 Select Bibliography and Information Sources 82 Endnotes 83 (iii)

8 INVITED CONTRIBUTIONS Case Study IAN Incubator - Providing a growth platform for entrepreneurs 28 Perspectives Technology Business Incubation - Harbinger of IPR driven innovation in India 42 Opinion Angel investments: Risk capital to drive India's entrepreneurial engine 48 Case Study Catalysing angel investment: The example of Mumbai Angels 62 (iv)

9 List of Tables Table No. Description Page No. SECTION B: INCUBATION 2.1 Illustrative list of support activities provided by the incubator in different areas Information captured for each incubation facility Distribution of incubators by region Distribution of incubators by region Distribution of incubators by city Distribution of incubators by type of city Distribution of incubators by type of city Region wise proportion of incubation facilities in different tiers Distribution of type of host organization Proportion of incubation facilities by type of host organization in different regions Proportion of incubation centres in metro and non-metro cities by host organization type 4.10 Region-wise analysis of incubation focus areas No. of focus sectors indicated by the incubator Distribution of incubators in different geographical zones by funding institute Distribution of incubators on the basis of host organizations funded by different organizations 4.14 Incubators and the number of sources of funding support Split up of incubator types in different regions Overview of support services provided by incubators Distribution of incubatees by region Distribution of incubatees by type of city Distribution of incubatees by city tier Distribution of incubatees in incubators classified by type of host organization Graduation ratio of incubatees (v)

10 Table No. Description Page No. SECTION C: ANGEL INVESTMENTS 7.1 Composition of angel investments sample Composition of angel investors sample Year-wise number of angel investments Angel investments in six metro cities Angel investment in different sectors Cross tabulation of angel investments (percentage) between sectors and regions Angel investors by gender Distribution of angel investors on the basis of professional experience 59 SECTION D: DIRECT GOVERNMENT INVESTMENT IN EARLY STAGE COMPANIES 8.1 Overview of selected government schemes Number of investments in different schemes Distribution of supported projects by region Distribution of supported projects by state Distribution of supported projects by city Distribution of number of investments by type of city Distribution of number of investments by city tier Region-wise proportion of projects supported in different tiers Proportion of firm supported in different sectors by the four schemes Region wise range of investment 77 (vi)

11 List of Figures Figure No. Description Page No. SECTION B: INCUBATION 2.1 Incubation process Incubators and the industry focus Type of host organizations and sector focus Sector focus by type of city Incubators by source of funding organization Number of incubators under different categories Estimated cumulative incubatees as a proportion of total sample size Sector wise distribution of incubatees Incubatee sector by incubators in different host organizations Sector wise distribution of incubatees by city type 39 SECTION C: ANGEL INVESTMENTS 7.1 City wise distribution of angel investments Region wise distribution of angel investments Distribution of angel investors by nationality Educational background of angel investors Subjects in which angel investors have earned degrees Proportion of angel investors who have worked abroad Analysis of angel investors by years of work experience (as at 2012) Number of angel investors by background 60 SECTION D: DIRECT GOVERNMENT INVESTMENT IN EARLY STAGE COMPANIES 8.1 Projects supported in different sectors Industry focus by type of city Proportion of entrepreneurs by gender Gender of entrepreneurs by city tier Rounds of financing support received by projects Rounds of support by city type 76 (vii)

12 Figure No. Description Page No. 8.7 Amount of support received by projects Amount of support by city tier Status of projects Region wise success rate of projects 79 (viii)

13 Section A: The Annual India Venture Capital and Private Equity Report Series 1.0 Overview Traditionally, India has been a country that is entrepreneurially active. The 26.1 million enterprises 1 in the micro, small, and medium segment testifies to this fact. In the last two decades, several first generation entrepreneurs have emerged - though the phenomenon was initially seen in the information technology domain, today it has expanded to every other sector. Sources of financing to support such entrepreneurs have simultaneously evolved. The most notable development in entrepreneurship financing during this period is the growth of the Venture Capital and Private Equity (VCPE) industry in India. From virtually nothing in the 90's, the India has emerged as one of the top destinations for VC investment. In recent years, Indian VCPE industry has clocked the fastest growth rate worldwide. The annual series of the India Venture Capital and Private Equity Report is an attempt by IIT Madras to track the contours of development in this sector. The series was started in 2009, when the first report in the series was published and the 2012 report is the fourth in the series. Every report explores a specific facet of the Indian VCPE industry in detail or a field that is closely related to VCPE. The 2009 report focused on the VCPE investments and the 2010 report focused on the investors in India. The 2011 report focused on Real Estate and Infrastructure. The 2012 report is on a topic that has not caught the attention of the radar, but nevertheless forms an important link in the venture capital continuum, viz., incubation and angel investments. By the time you complete reading this report, we hope you would feel that this report has been the most comprehensive work on incubation support and angel investment in India done till date. The report is structured in four sections. In this first section, we highlight some of the salient findings from the past three year reports. Section B focuses on incubation, Section C on angel investments, and Section D on direct government investment in start-ups. 1.1 VCPE Report 2009: On top of the world, still miles to go An analysis of venture capital and private equity investments in India during The report was based on an analysis of 1912 VCPE transactions during Investment analysis was based on 1395 deals totaling $44 billion. The VCPE investments in India have become broad based over the years. While 4 out of 10 industry categories accounted for more than 80% PE investments in 2004; investments were much more evenly distributed across the 10 industry categories in Late stage and PIPE (Private Investment in Public Equity) deals had consistently accounted for a major share of VCPE investments over the five year period ending 2008 with late stage deals being the least affected even in the period of economic downturn while early stage deals had suffered the most. 1

14 VCPE investments in India were much more uniformly distributed across different industries as compared to developed markets like US and UK where three out of ten industry classes accounted for more than 70% investments. Indian VCPE investments with a CAGR of 47% during (i.e. even after considering the severe negative growth in 2008) were one of the highest in world. The CAGR in the US for the same period was just 6%. While VCPE investments in India as a percentage of GDP had grown from a mere 0.4% of GDP in 2004 to more than 1.5% of GDP in 2008, VCPE investments in US as a percentage of GDP was relatively constant and hovered around % of GDP. Though VCPE investments were considered as medium to long term investments, the average duration of VCPE investments in India was remarkably low i.e. 17 months. The average time interval between successive rounds of VCPE funding typically varied between months. 82% of total amount invested by VCPE investors over the last five years in India were new or fresh investments, thereby signifying very low proportion of follow-up investments which indicates the inclination of VCPE investors to continually look for newer high growth avenues and modify the investment choices accordingly out of 1503 (or 81%) companies that received VCPE funding had received only one round of VCPE investment and only 79 (5%) companies had received more than two rounds of PE-VC funding. Our analysis revealed the propensity of VCPE investors to invest in well-established firms as nearly 50% of the investments were in companies that had been incorporated for at least 8 years. 1.2 VCPE Report 2010: The contours of smart capital An analysis of venture capital and private equity investors in India during The report is based on an analysis of 338 VCPE Investors who had invested in as many as 1,870 deals during the period Deal value of the investments was available for 1511 deals by 309 VCPE firms. Foreign investors accounted for a large proportion of VCPE investors in India. 242 (or 72%) of the 338 VCPE investors who had invested in India during were foreign investors. This indicates the factor of confidence that foreign investors had on investing in India and in Indian companies. Domestic investors on the other hand constituted only 28% of the total investors. The total number of investors who had presence in India had significantly increased over the years. The variety of investors investing today is a strong contrast to a handful of VCPE investors in the year Not only have the number of investors increased, but the diversity of the investors has also increased. The VCPE investors grew about 3.5 fold during and nearly 5 fold during In other words there was an 18 fold increase in the number of investors within a decade. 20% of the deals of domestic VCPE investors were in early stage deals. Consistently, the proportion of early stage investments (in terms of number of investments) made by foreign investors had been lower than that of domestic investors. 81% (or 252) of the investors constituted for just about 19.5% ($9,043 million) of the total investment made during In terms of number of deals, they account for 48% of the total deals during the six year 2

15 period. This shows the skew in the distribution of investments and investors. In the Indian market, there were a large number of small investors, but they made very few investments. About 4% of the total investors made an investment of more than $20 billion, which accounted for more than 43% of the total investments. The average number of deals made by these large investors was about 26, which translated to about four investments in a year and the average deal size was $59.64 million. This indicated that the most active investors in India were those who invested in larger deals. 35% of the VCs who had invested in India during , had invested in only deal. About 48% of the VCs invested between 2 15 deals. Less than 10% of the VCs had invested in more than 15 deals. This indicated that though a large number of VCs invest in India, only a few of them were active and continued to make investments on a sustained basis. There was no significant difference between domestic and foreign investors in terms of shareholding acquired. In more than one-third of the deals the percentage shareholding acquired by the investors had been less than 10%. The percentage shareholding acquired was less than 20% in more than 50% of the deals that have been analyzed. 1.3 VCPE Report 2011: Fueling growth and economic development - Private equity investments in real estate and infrastructure The report was based on an analysis of 290 PE investments during totaling $17 billion in Real Estate and 170 PE investments during totaling $15.4 billion in infrastructure. A. Real estate Overall analysis The estimated investment of $17 billion in real estate sector translated to about 34% of the total PE investments of about $50 billion made in India during that period. Almost 80% of investment happened through foreign investors, and domestic investors contributed to the remaining to 20%. In terms of the number of deals, foreign investors accounted for 57% of deals. However, after 2008, the number of deals by domestic investors actually increased. It was also found that domestic investors were more consistent, both in terms of investment made as well as the number of deals, as compared to foreign investors. The average land development in a real estate project that had PE investment worked out to acres per project. The total estimated land development from projects that had PE investment works out to a phenomenal 82,900 acres, i.e., twice the area of Chennai city. The average constructed saleable / leasable area in projects that had PE investment was about 4.01 million sq. ft. per deal. The total leasable / saleable area from all the deals that had PE investment was estimated at about 1130 million sq. ft., which is equivalent to about 403 times the area of Empire State Building in Manhattan, New York! Geographical distribution of investments Tier 1 and Tier 2 cities received equal amounts of investment, whereas Tier 3 cities had substantially lower amount of investments. In terms of number of deals, Tier 1 cities accounted for the largest 3

16 proportion. While the number of deals in Tier 2 cities was higher in 2008, in each of the remaining years, Tier 1 cities accounted for most of the deals. The average investment in Tier 2 cities was higher than that of Tier 1 cities, indicating that the projects in Tier 2 cities were larger. Analysis of the break-up of investments indicated a contrasting pattern between foreign and domestic investors. A higher proportion of investments made by foreign investors were in non-metro and Tier 2 cities, whereas domestic investors make most of their investments in metro and Tier 1 cities. However, the average project investment made in Tier 2 cities was higher for both domestic and foreign investors. Segments and valuation Most of the PE investments in real estate were in residential segment. Within the residential segment, luxury segment accounted for the highest proportion of investment. The total number of active PE funds that were investing in real estate was 124. The proportion of domestic and foreign investors was 30% and 70% respectively. The proportion of Dedicated Real Estate (RE) and General Purpose funds was 48% and 52% respectively. The average level of shareholding acquired by an investor in a real estate project was 41.75%, much higher than the 20-25% stake that is normally acquired by growth stage PE investors. Since a higher shareholding also facilitates a higher degree of control and monitoring by the investors, it can be said that PE investors monitor their real estate investments more actively and contribute towards institutionalizing higher levels of corporate governance standards in the sector. B. INFRASTRUCTURE Overall analysis The estimated investment of $15.4 billion in infrastructure accounted for about 31% of the total PE investments in India during Telecom accounted for 56% of the amount invested, with transport and power accounting for the remaining, in almost equal proportion. The number of active funds that were investing in infrastructure was 105. The proportion of domestic and foreign investors was 22% and 78% respectively. The proportion of Dedicated Infrastructure and General Purpose funds was 31% and 69% respectively. Foreign investors contributed to 73% of the investment and domestic investors contributed to 10% of the investment. The remaining 17% has been syndicated between domestic and foreign investors. The proportion of investment made by sector specific funds in infrastructure had increased over the years. This can be seen as an indication of the potential that PE investors see in the Indian infrastructure sector. Whenever there has been syndication between domestic and foreign investors, the average investment has been higher. This indicates that the foreign investors find presence of domestic investors who have a better understanding of the ground realities in India, more comforting and are able to make higher investments under such circumstances. 4

17 Segments and valuation The total generation capacity that was expected to be created from projects with PE investments is at least 24,164 MW. This was 57.25% of the installed capacity in the private sector or 13.25% of the total installed capacity as of Sep 2011 in India. The estimated length of roads that would be / has been constructed by firms that have received PE investment worked out to 7898 km. This translated to about 51% of the total national highways constructed between FY07 FY10. In the ports segment, projects with PE investment were expected to create additional port capacity of MTPA in the country. The average shareholding acquired by domestic and foreign investors was more or less the same, despite the fact that foreign investors make larger investments in a deal. Domestic investors and Dedicated Infrastructure funds have been able to acquire higher average shareholding per million investment made because of their familiarity with local operating conditions and infrastructure sector expertise. Project sponsors seem to recognize the value that PE investors bring in addition to their capital. Complete past reports can be obtained on request from 5

18 Section B: Incubation 2.0 Incubation support in India 2.1 Overview of business incubation Entrepreneurial businesses play a significant role in promoting innovation and generating employment, and thereby contributing to economic growth. In recent years, the government of India has formulated various support schemes that aims to develop and promote entrepreneurship. These schemes can be broadly divided into two categories: those that aim to develop the skills and capabilities of entrepreneurs and those that provide financing and other forms of business support to entrepreneurial entities. An example for the former is the setting up of entrepreneurship development centers. Schemes such as venture capital funding, grants, concessional loans, setting up of incubation centers are examples of the latter. Incubation centers, is a form of finance cum business services support scheme targeted at young, first generation, as well as entrepreneurs from disadvantaged backgrounds. Accessing early stage financing remains the biggest hurdle for many entrepreneurs. Bank funding remains difficult for many first generation entrepreneurs because of the common requirement of immovable assets as collateral. Investment from VC and other sources of equity funding is either accessible only for a small proportion of entrepreneurs or after the entrepreneurial entity has reached a certain scale and stage of development. This is where incubation support schemes play a role. Business incubators are programs designed to support the successful development of entrepreneurial companies through an array of business support resources and services, developed and orchestrated by incubator management and offered both in the incubator and through its network of contacts. 2 Apart from providing financial support, they also provide other forms of business support services that enable the entrepreneurial firms to reach a stage where they are able to sustain the operations on their own, or access capital from other sources such as venture funds and banks to grow to the next stage. Even though the role of incubators is broadly well understood, there is a lot of variation in the operating models of different incubation schemes. Different Incubators vary in the type of support they provide to the companies that they support (referred as incubatees) and the type of industries they support. Table 2.1 lists some basic support activities provided by the incubators. 3 Entrepreneurs can choose to obtain only those services that they need from the incubator and does not necessarily have to avail all the services that incubators offer. They also differ in their goals which may vary from diversifying regional economics to generating employment or economic growth and enabling technology and knowledge transfer from large educational institutes and research institutes to emerging entrepreneurs. Figure 1 provides a schematic representation of a typical incubation set-up. 2.2 Accessing incubation support The objective of incubation is to support, at a basic level, the commercialization of innovative business ideas that are in concept or the laboratory stage, which might have otherwise been lost for want of support. Entrepreneurs in need of support apply to the incubators as per their requirements of the incubator. These applications then undergo a screening process, in which entrepreneurs with high potential are short listed. The sector of operation of the entrepreneur and the type of support they require play an important role in this screening process. The startup companies not only need to have high prospect for growth, they also must align with the vision and 6

19 objectives of the incubation centers. The incubation centre offers to support those companies that meet its selection criteria. Table 2.1: Illustrative list of support activities provided by the incubator in different areas Infrastructure Management & Strategy Finance High-speed Internet access Help with business basics Help with Utilities and office space Networking activities accounting/financial Laboratory and Marketing assistance management experimental facilities Help with presentation skills Access to bank loans, loan Links to higher education resources funds and guarantee Links to strategic partners programs Comprehensive business training programs Access to angel investors or Advisory boards and mentors venture capital Management team identification Help with business etiquette Technology commercialization assistance Help with regulatory compliance Intellectual property management Support from host institute Governance system Competent incubator team Support from financing institute Network partners Missions / objectives Selection of potential applicants Incubation process Successful businesses Development of region / country Business development services Advisory services Mentoring Finance Work space and other facilities Figure 2.1: Incubation process 4 The government agency implementing an incubation program provides support for setting up incubation centers in various universities and research institutes. These incubation centers in turn identify and select entrepreneurs that they would incubate in the incubation centers. Funding support to the companies selected for incubation, which ranges from $12,000 to $50,000 per firm, would be sanctioned by the implementing agency, but administered by the incubation centers. The incubation centre is also expected to provide other facilities such as office space, 7

20 utilities, business support services, laboratory, etc., to the companies selected for incubation. While many other forms of support are available to entrepreneurial companies at any stage of the company life cycle, incubation support is extended only to businesses that are in the inception stage. The incubation support can normally be availed up to a period of three years, after which the firms are expected to graduate from the incubation centers, so as to enable them to select new companies that can be supported. It is expected that the graduated incubatees would have grown to a certain level that either makes their operations sustainable or enable them to secure other forms of support such as VC and angel funding. It should be noted that not all incubation facilities provide all forms of support mentioned in Table 2.1. Entrepreneurs need to make sure what they are looking for, and then they should accordingly take the decision on which incubation facility to seek support from. The selection of facility also depends on the stage in which the entrepreneurs are seeking support. On the one hand, we have institutes which provide support to companies who have developed the basic idea, and need support for its implementation and growth. On the other hand we have institutes which provide support to talented students from the very early stage of idea generation and research & development in order to promote them to become entrepreneurs in the first place. However, the common purpose of these incubation centers is to provide early stage support to entrepreneurial firms and provide them with a better chance of survival. There are studies which indicate that incubation facilities have produced much better success rates for entrepreneurs than normal. The creation of such successful businesses, in turn, enhances growth of the nation as a whole. 2.3 Incubation support vis-a-vis VC support There are obvious differences between the operations of these incubation facilities to those of VC firms. Firstly, though VC firms contribute and add value to the companies that they support, their main form of support is financial. But in an incubation centre, financial support is not as large as that of a VC nor is it the central theme. Secondly, VC industry in India is highly dominated by private sector. The private nature of these firms makes return generation as their main objective. On the other hand, though the incubation centers can be located in private facilities, the incubation support schemes under which the incubation centers are set up are run by the government. They too have the potential to create high financial benefits for the host institute, but financial returns are not the primary motive of most of these institutes. They are basically established to promote new age entrepreneurs in the country. Thirdly, there is a large difference in the amount of financial support provided by the two sources. The amount of financial support provided by incubation centers is limited, and therefore they support only early stage start-up firms where the funding requirement is not very large. On the other hand, VC firms are able to make larger investments, usually in excess of INR million, and are therefore able to support the entrepreneurs in the growth and late stages. An ideal scenario for an entrepreneur could be to take the support from an incubation facility for establishing the firm and its initial development, and then avail VC investment opportunities to grow on a large scale. 2.4 Incubation support schemes in India India has a long standing focus on technology development. Numerous technology institutions, universities, and research centers have been set up to meet the need for trained manpower in technology as well as to develop indigenous technology to meet the development needs of the country. Many of the centers have played an important role in achieving this objective in various areas such as defence, space, atomic energy, electronics, biotechnology, telecommunication, chemical sciences, to name a few. However, there have been substantial challenges in realizing the economic benefits from these investments, as commercialization has not been in tandem with the developments in technology. 8

21 Simultaneously, the level of interest in entrepreneurship in India has increased remarkably after the economic liberalization in the 1990's. Government has recognized that entrepreneurship can play an important role in bringing these technologies to the marketplace and has implemented various policies that support the creation of entrepreneurial businesses. Among the first bodies created to address such requirements was the National Science and Technology Entrepreneurship Development Board (NSTEDB) of Department of Science and Technology, Government of India. The board was set up by the Government of India in NSTEDB had launched two major programs to achieve the objective of promoting technology driven enterprises by entrepreneurs. The first one was the launch of Science and Technology Entrepreneurs Parks (STEPs) in early 1980s. The other program was the launch of Technology Business Incubators (TBIs) in The main emphasis of STEPs was to create an environment for generation of new entrepreneurs. They created linkages among academic and R&D institutions on one hand and industry on the other hand to promote graduating S&T candidates to pursue a career in entrepreneurship and innovation rather than getting a job. In simpler words, they tried to convert job-seekers into job-generators. TBIs on the other hand concentrated more on the growth and sustainability of new entrepreneurs. They also tried to ensure easy commercialization of their research outputs. The incubation landscape in India is still highly dominated by Government sector. In addition to the NSTEDB schemes mentioned above, government has also launched the following schemes: Business Incubation (BI) scheme of the Ministry of Micro, Small, and Medium Enterprises (MoMSME), Technology Incubation and Development of Entrepreneurs (TIDE) scheme of the Ministry of Information Technology; and Biotech Park and Incubators (BPI) scheme of the Department of Biotechnology. All the above incubation programs are being implemented in India by the central government, which gives an indication of the importance attached to this activity at the national level. The expected contribution from incubation support has been highlighted in various instances. For example, by generating employment, the incubation centers are expected to meet the goals set forth in the National Common Minimum Programme of the government. Similarly, by bringing in innovation to the manufacturing sector, it is expected to contribute to the goals to National Manufacturing Competitiveness Mission. The scale of implementation also gives an indication on the importance attached to incubation. For example, the TBI scheme, which has been implemented since 2001, has resulted in setting up of 64 incubation centers, which had totally incubated more than 350 companies. The BI and TIDE schemes, which were implemented from 2008, envisaged setting up of 127 incubator centers in the country, and these are expected to incubate about 1135 companies in the first round. The total investment outlay for these two schemes was estimated at more than Rs. 1 billion. Though the process of operation of the different schemes is more or less the same, they have different thrust areas. For example, the NSTEDB and TIDE focus on supporting technology based enterprises. On the other hand, MoMSME scheme have a vast scope in the type of entrepreneurs it supports. They support entrepreneurship activities in almost all sectors of the industry, and specifically seek to promote entrepreneurship activities in the remote areas of the country. More recently, several private organizations have started setting up incubation centers, which are funded by private capital. There are many differences between incubation facilities set up with government funding and private capital. The government supported incubation facilities are comparatively much more process oriented, and the time taken to receive support from these facilities is usually higher. Private incubation facilities prefer to close the deals with entrepreneurs in much less time in order to make themselves the preferred choice against competition. Another major difference between the two is that, as mentioned before, Government facilities are usually not-for-profit institutes, who mainly aim to promote entrepreneurship activities, and make profit 9

22 generation as their secondary objective. The private incubators on the other hand are for profit institutes and the projected returns from the idea play an important role for them to decide upon which companies to support. 2.5 Innovation in incubation support The latest trend in the field of incubation is the creation of virtual incubators. Unlike the classical incubation model which requires the establishment of a physical facility to support startup firms, virtual incubators support firms through modes of communication like the internet and telecom. This incubation model is more suited for those entrepreneurs who do not want to move their offices to the incubation facilities, but still seek the financial, advisory, management and networking support provided by incubation facilities. The only limitation of this model is that entrepreneurs cannot avail the well equipped infrastructure support provided by incubation facilities. It however has an obvious advantage over the classical model as it eliminates the barrier that incubation facilities had in terms of localization. With this virtual model, startup firms in the remotest areas of the country can now avail incubation support. 10

23 3.0 Description and sources of data 3.1 Description of data Incubators This report is based on an analysis of 159 incubation facilities that have been set up in India till Adequate diligence has been taken to ensure that the list of incubation facilities included for analysis is as exhaustive as possible. Table 3.1 gives the details of information captured for each incubation facility Table 3.1: Information captured for each incubation facility Incubator data Focus and background data Facilities provided to incubators Name of the incubation facility Sector focus Floor area provided to each Host organization of the Type of incubation facility incubatee incubation facility Organization supporting the Average period of incubation Nature of the host incubation facility Incubation capacity organization No. of companies incubated Location No. of companies graduated Year of establishment Performance of the incubatee companies Incubatees Since the incubatee companies are in a very early stage of the company lifecycle, detailed information as in the case of incubators was not available. The most readily available information about the incubatees was the business objective of the entity. 3.2 Description of variables Name of the incubation facility: This captures the name of the incubation facility, and helps to identify if there are more than one incubation facility in a host organization. For example, IIT Madras has set up two incubation centers under it. Host organization of the incubation facility: This captures the name of the host organization where the incubation facility has been set up and/ or the organization that governs the operations of the incubation facility. Most of the incubation facilities are not standalone independent entities, but are set up by universities and research centers' within their premises. Nature of the host organization: This captures the type of host organization that has setup the incubation facility. The host organizations were classified into five categories as follows: o Central university: This includes educational institutions and universities that are supported by the national government. Examples include the Indian Institutes of Technology, National Institutes of Technology, etc. 11

24 o o o o State university: This includes educational institutions and universities that are supported by the state government. Examples include Anna University in Tamilnadu, HBTI-Kanpur, JNTU- Hyderabad, etc. Private university: Universities and educational institutions supported by the private sector are classified in this category. Examples include BITS-Pilani, Amity University, MICA-Ahmedabad, Manipal Institute of Technology, etc. Government non-university: Incubation facilities set up in establishments that are not universities or educational institutions are classified in this category. For example, incubation facilities that have been set up in research laboratories, technology parks, etc. would come in this category. Incubation facilities in both state government and national government supported establishments were grouped under a single category. Examples include incubation facilities in Mahatma Gandhi Institute for Rural Industrialization in Wardhwa, Central Mechanical Engineering Research Institute in Durgapur, Central Institute of Fisheries Technology in Cochin, etc. Private non-university: Incubation facilities set up in private establishments that are not universities or educational institutions are classified in this category. Examples in this category include India Angel Network incubators in New Delhi, Vivekanand Institute of Biotechnology in West Bengal, business incubator at ICRISAT Patancheru, etc. Location: This variable captures the city in which the incubation facility is located and the characteristics of the city. The information captured under this category include: o o o o Region: The city was classified into any one of the five geographical regions, viz., North, South, East, West, and North-East. State: The city was also mapped to the state in which they were located. Type of city: Cities were classified as Metro or Non-Metro based on the living conditions and development. Six cities, i.e. Bangalore, Chennai, Delhi, Hyderabad, Kolkata, and Mumbai were classified as Metro cities. All other cities are classified as Non-Metros. City population: Cities were classified into three categories, Tier I, II and III. The recommendations of Sixth Pay Commission of the Government of India was used as a reference in classifying the cities in this category. 6 This classification is based on the population of these cities and is a generally adopted ranking system used by the Government of India to decide the house rent allowance in different Indian cities. The list of Tier I, II, III cities as per this classification is given below: Tier I cities: This comprised of six metro cities, viz., Bangalore, Chennai, Delhi, Hyderabad, Kolkata, and Mumbai. Tier II cities: Ahmedabad, Jaipur, Kanpur, Nagpur, Lucknow, Patna, Pune, Surat, Visakhapatnam, Vijayawada, Kochi, Coimbatore, Rajahmundry, Thiruvananthapuram, 12

25 Bhopal, Vadodara, Ludhiana, Agra, Madurai, Nashik, Faridabad, Varanasi, Rajkot, Jabalpur, Jamshedpur, Allahabad, Amritsar, Indore, Gorakhpur, Hubli-Dharwad, Bhavnagar, Raipur, Mysore, Mangalore, Guntur, Bhubaneshwar, Amravati, Aurangabad, Srinagar, Bhilai, Warangal, Kakinada, Nellore, Sholapur, Ranchi, Guwahati, Gwalior, Chandigarh, Patiala, Jodhpur, Tiruchirapalli, Pondicherry, and Salem. Tier III cities: The remaining cities were classified as Tier III cities. Year of establishment: This indicates the year in which the incubation facility was established. Wherever this information was available, it was also recorded. Sector classification: In most cases, if not all, incubation centers have well identified sectors in which they would support the incubatee companies. Sector classification has been done at two levels and details are given below. o Level I classification: The sectors were classified into six categories as follows: ICT: Centers that provide incubation support to early stage companies in Information and Communication Technology (ICT) and related fields. Agriculture & healthcare: Biotechnology, life sciences, Agriculture, food, health sciences, and related areas were included in this category. Engineering Sciences: Chemical, materials, physical, engineering sciences and other related areas were classified in this category. Energy: This category includes clean technology, energy, renewable and other related areas. Manufacturing & infrastructure: Companies in textile, manufacturing, construction, infrastructure, and other related areas were included in this category. Others: Companies that could not be clearly classified in any of the above five categories were grouped together in this category. o Level II classification: This classification is slightly finer as compared to the Level I classification. Companies were classified into 10 categories as follows: Agriculture, Environment & Forestry Engineering, Mining, Constructions & Real Estate IT & ITES Transportation & Logistics Manufacturing Healthcare, Pharmaceutical & Life Sciences Banking, Finance & Insurance Telecom, Media & Entertainment 13

26 Non-financial & Consumer services Others: Companies that could not be classified in any of the above nine categories were classified in this category Type of incubation facility: Incubators were classified in four different types based on the target segment of the incubation centre. o o o o Business Incubators (BI): These are largely sector agnostic incubation facilities and provide support to many types of businesses. Technology Business Incubators (TBI): Incubators that support businesses that have a strong technology component are classified in this category. Science and Technology Parks (STP): Incubators that support the generation of new entrepreneurs and innovators are classified in this category. Science and Technology Entrepreneurship Parks (STEP): Incubators that are focused on promoting graduating candidates in science and technology disciplines to become entrepreneurs and job creators come under this category. Organization supporting the incubation facility: This indicates the type of organization that provide financial support to setting up of the incubation facility as well as to the organizations that receive incubation support to the facility. This is classified into four categories: o o o o Central government: This includes incubating centers that have been set up under various central government schemes. Examples include the TBI, STP, and STEP schemes under the Ministry of Science and Technology, BI scheme of the Ministry of Micro, Small and Medium Enterprises (MoMSME), and Biotechnology incubation support scheme of the Department of Biotechnology. State government: This category includes those incubation facilities that are supported by State governments. Private: Privately funded incubation centers come under this category. Others: Incubation centers that could not be clearly classified because of inadequate information were grouped in this category. Floor area provided to each incubatee: This gives the floor space (in sq. ft.) provided to each incubatee in the incubation facility. Average period of incubation: This is the average time period (in years) for which incubation support is generally available to the incubatee. Incubation capacity: This indicates the capacity of the incubation facility in terms of the number of incubatee companies that it can support at any given time. 14

27 No. of companies incubated: Indicates the number of companies that have been incubated in the facility till No. of companies graduated: Indicates the number of companies that have graduated from the incubation facility till Performance of the incubatee companies: This includes the aggregate revenues and employment generated by the incubating companies supported by the facility. 3.3 Sources of data Unfortunately, data on various incubation facilities in India are not provided by any of the commercial databases. We have therefore used a variety of sources to compile the dataset pertaining to the incubating facilities Data on incubators The main source of data regarding incubators was obtained from Database of Business Incubators and Science and Technology Parks across India that has been compiled by Venturecenter. Other than this we have taken data from infodev Incubation Support Center (idisk) Asia-Pacific database, Asia-Pacific Incubation Network (APIN) database, NSTEDB website, Department of Science & Technology website, Department of Biotechnology website, and MoMSME website. We have also checked the individual websites of the incubators for more detailed information. In addition to this, we have contacted the managers of the incubators for the more information about their facilities, and the responses received were added to our dataset Data on incub atees Data on the companies incubated in the various incubation facilities were obtained from the following sources: Venture Intelligence database, the First Status Report on TBIs in India, 2009 prepared by Indian STEPs and Business Incubators Associations (ISBA) with support from NSTEDB, direct correspondence from the incubation centre managers, and websites of incubation centers. 15

28 4.0 Analysis of incubation support This section presents the results from the analysis of incubation centers in India. Broadly, the analysis has been structured in four sections. In the first section, the analysis is based on the location of incubation facilities - the regional, state, and city-wise distribution of incubation centers. In addition, the distribution of incubation centers is also analyzed by the type of host organization. In the second section, analysis is based on the sectors (i.e., the focus areas) in which the incubators support the start-ups. The third section looks at analyzing the incubators based on the source of funding support and the fourth section looks at the type of incubators. 4.1 Location of incubation facilities Distribution by region Table 4.1 gives the distribution of 159 incubation centers by region. As it can be seen, there is substantial variation in the distribution of the incubation centers in different regions. Among the five regions, North-East has the least number of incubation centers, followed by East. If incubation centers are seen as important tools for economic and entrepreneurship development, then there should be focused efforts to increase the number of incubation centers in these two regions. Table 4.1: Distribution of incubators by region Region No. of incubators % of Total East 14 9% North 38 24% North East 4 3% South 71 45% West 32 20% Total % The largest number of incubation centers are located in the South and this region accounts for close to half of all the incubation centers in India. This could be attributed to a variety of reasons such as a higher level of entrepreneurship activity and a large number of educational institutions that exist in the four Southern states of Tamil Nadu, Karnataka, Andhra Pradesh, and Kerala. While the Southern region can be expected to have a large number of incubation centers because of a high level of overall economic development in all the four Southern states, what is surprising is the difference between the number of incubation centers in South and North, the region that has the second highest number of incubation centers. While North and West are closely bunched, the number of incubation centers in South is more than sum of incubation centers put together in North and West Distribution by state Table 4.2 gives the distribution of the incubation centers in the top 10 states. As it can be seen the top 10 states account for 87% of all the incubation centers. Tamil Nadu is the top state in terms of the number of incubation centers, and it accounts for close to one-fifth of all incubation centers in India. The dominance of Tamil Nadu in incubation activity is a bit surprising because, it does not occupy the top rank on the number of VC investments in the state. However, Tamil Nadu has the highest number of Micro, Small, and Medium (MSME) enterprises in India, 16

29 which is an indication of the high level of entrepreneurship activity that exists in the state. The presence of a large number of incubation centers is another confirmatory indicator of this underlying trend, since incubation centers strengthen the overall entrepreneurial ecosystem in the state. It can also been seen from Table 4.2 that the top three states in the top 10 list are Southern states and all the four Southern states figure in the list, which is not the case with other regions. Top 3 states account for 40% of all the incubation centers in India, and half of all the incubation centers are concentrated in just four states. To strengthen the overall entrepreneurial ecosystem, there should be targeted efforts to promote the setting up incubation centers in other low ranked states. Table 4.2: Distribution of incubators by region State No. of incubators Cumulative percentage Tamil Nadu 31 19% Karnataka 17 30% Andhra Pradesh 16 40% Gujarat 15 50% Uttar Pradesh 14 58% Maharashtra 14 67% Delhi 9 73% Kerala 7 77% Orissa 6 81% West Bengal 5 84% Haryana 5 87% Total Distribution by city Table 4.3 gives the list of top 10 cities in terms of the number of incubation centers present in these cities. Chennai and Bangalore occupy the top positions, with each having 12 incubation centers, and together accounting for 15% of all the incubation centers in India. Table 4.3: Distribution of incubators by city City No. of incubators Cumulative percentage Chennai 12 8% Bangalore 12 15% New Delhi 9 21% Hyderabad 9 26% Ahmedabad 7 31% Pune 6 35% Coimbatore 6 38% Noida 4 41% Ghaziabad 4 43% Mumbai 4 46% Total

30 This is also different from the pattern seen in VCPE investments, where Mumbai occupies the top slot in terms of the number of investments made. A large number of VCPE investors are also headquartered in Mumbai. However, Mumbai does not have the same level of prominence in terms of the incubation centers. This indicates that there are substantial differences in the entrepreneurial ecosystem and patterns in entrepreneurship development in different regions Distribution by type of city As indicated previously, cities were divided into two categories, viz., metro (metropolitan) and non-metro cities, based on the living conditions and the level of development. Table 4.4 provides the distribution of incubation centers between two categories. Table 4.4: Distribution of incubators by type of city City type No. of incubators % of total Metro 48 30% Non-metro % Total 159 It is seen that 70% of the incubation facilities are located in non-metro cities, and only 30% of the incubation centers are located in metro cities. In a way, this is a very positive trend as opportunities for availing incubation support are not restricted to just entrepreneurs in metro cities. Entrepreneurs located in non-metropolitan cities face several additional challenges - in terms of access to capital, human resources, top class facilities, to name a few - as compared to those metropolitan cities. To a certain extent, presence of incubation facilities help entrepreneurs in non-metropolitan cities by providing with a business enabling environment Distribution by city tier We also analyzed the distribution of incubation centers in cities that were classified based on their population. The cities were classified in to Tier I, II or III. The results are given in Table 4.5. Tier I consists of only the metro cities, and the number of incubators in Tier I is therefore equal to that of the incubators in metro cities as given in Table 4.4. It can be seen that the proportion of incubators in Tier III cities is higher than that of Tier II cities. This further confirms the fact that incubation centers have been established in many smaller towns, thereby providing various entrepreneurship support services to young entrepreneurs in these towns. Seen in that perspective, incubation centers are playing an important role in developing entrepreneurship outside of the large cities. Table 4.5: Distribution of incubators by type of city City tier No. of incubators % of total Tier I 48 30% Tier II 51 32% Tier III 60 38% Total 159 Table 4.6 gives the proportion of incubators by type of city in the five regions. In South, the highest proportion of incubation facilities are in Tier I cities. This is very different with respect to other regions, where Tier II or III cities account for the highest proportion of incubation centers. This could be because of the fact that out of the six metropolitan (Tier I) cities, three (Chennai, Bangalore, and Hyderabad) are located in the South. South has the 18

31 lowest proportion of incubation centers in Tier III cities among all the five regions. This indicates that though South has the largest number of incubation facilities, they are mostly concentrated in the big cities. Table 4.6: Region wise proportion of incubation facilities in different tiers City tier East North North-East South West Tier I 14% 24% 46% 13% Tier II 29% 37% 50% 21% 50% Tier III 57% 39% 50% 32% 38% Distribution by type of host organization Table 4.7 classifies the incubation centers based on the host organization. In many instances, incubation centers are set up in a larger entity such as universities, research labs, technology parks, etc. These organizations are called host organizations of the incubation centers. For example, Indian Institute of Technology Madras is the host organization for the Rural Technology Business Incubator, which has been set up with the support of the institute. At a very broad level, host organizations were classified into universities and non-universities. Host organizations, which are teaching institutions and actively involved in education and award of degrees are classified as universities. Other host organizations are classified as non-universities. Examples of this category include research laboratories (e.g., CSIR labs), technology parks etc. Table 4.7: Distribution of type of host organization Host organization No. of incubators % of total Central university 28 18% State university 19 12% Private university 59 37% Subtotal university % Private non-university 32 20% Government non-university 21 13% Subtotal non-university 53 33% Subtotal government organizations 68 43% Subtotal private organizations 91 57% Overall total 159 Table 4.7 indicates that two-thirds of the incubation centers are located in universities and teaching institutions and non-universities account only for the remaining one-third. This indicates the contribution of universities towards in entrepreneurship development. Traditionally, universities were largely focused on teaching, research, and industry-partnerships. Increasingly, an additional facet is being added, which is to develop entrepreneurship. The presence of a large number of incubation centers in universities gives enough evidence for this. The universities were further classified into any of the following three categories - central, state, and private, depending on the agency that had set-up the institute. It can be seen that within the university category, private universities account for the highest proportion of incubation centers. This indicates that many private universities consider entrepreneurship development as one of their priority areas. The number of central universities having incubation centers is less than half of that of private universities. While many of the national institutes such as the IIT's, NIT's, and IIM's have set up incubation centers, the presence of such incubation centers in other institutions 19

32 such as Central Universities, is only marginal. Within the non-university organizations, private organizations account for higher number of incubation centers as compared to government organizations. This result is on expected lines, since private sector has more interest to promote entrepreneurship. The host organizations were also analyzed based on their ownership. While private sector accounts for a majority of the host organizations (53%), the public sector's contribution is also significant. 43% of the incubation centers are located in government organizations. This trend of public sector support to entrepreneurship underlines the priority accorded to this area by the government Region and city wise distribution by ty pe of host organization Table 4.8 indicates the proportion of incubation facilities by type of host organizations in the five different regions. It can be seen that South accounts for the highest proportion across all categories - University & Non-university, as well as Public & Private. But there are some interesting trends within the categories. For example, North accounts for a higher proportion of central universities that host incubation facilities, as compared to even, South. The proportion of state universities hosting incubation centers is substantially higher in South, among the five regions. This indicates that State governments in South are supportive for entrepreneurship development. Similarly, South accounts for a highest proportion of private universities that have incubation centers. This again indicates an increased interest among the private universities to support entrepreneurship in their institutions. Additional studies might be needed to identify the causal factors behind this finding. Table 4.8: Proportion of incubation facilities by type of host organization in different regions Type of host organization North North-East East West South Central university 36% 7% 7% 18% 32% State university 21% 0% 11% 21% 47% Private university 19% 2% 12% 14% 54% Total university 24% 3% 10% 16% 47% Private non-university 31% 0% 6% 22% 41% Government non-university 14% 5% 5% 38% 38% Total non-university 25% 2% 6% 28% 40% Total government 25% 4% 7% 25% 38% Total private 23% 1% 10% 16% 49% On the whole, South region accounts for a substantial proportion of incubation facilities in the country. There is a large gap between South and North, for most types of host organizations. However, the difference between North and West, which accounts for the third highest number incubation centers, is not very large. Additional studies would be needed to explain the reasons behind this dominance of Southern region as far as incubation facilities are concerned. Table 4.9 provides the proportion of incubation facilities in metro and non-metro cities based on the type of host organization. In line with the overall trend, non-metro cities account for the highest proportion of incubation centers in all categories except one, viz., private non-university. As expected, most of the incubation facilities in private non-university organizations are located in metro cities. It can also be noted that universities have a higher proportion of incubation centers in non-metro cities as compared to that non-universities. Within the university category, private universities have the highest proportion of centers in non-metro areas. This, in a way is a 20

33 surprising trend, as it indicates that private universities outside of the metro cities are more proactive in nurturing entrepreneurship. It is also possible that private universities outside of the metro cities are pro-active in providing such facilities because it helps them to attract better quality students and faculty to be associated with these institutions. Table 4.9: Proportion of incubation centres in metro and non-metro cities by host organization type Type of host organization Metro Non-metro Central university 32% 68% State university 37% 63% Private university 19% 81% Total university 25% 75% Private non-university 19% 81% Government non-university 53% 47% Total non-university 40% 60% Total government 29% 71% Total private 31% 69% 4.2 Focus of incubators Incubators, in many instances, have clearly identified the sectors in which they would support the entrepreneurial businesses. In this report, the sectors have been broadly classified into five categories: Information and Communication Technology (ICT), agriculture and healthcare, engineering sciences, energy, manufacturing and infrastructure. If the incubation facility was sector agnostic or if it was not possible to clearly identify the focus sectors, it was classified as others. This section looks at the analysis of incubation facilities based on the areas of focus Distribution of incubators based on sector focus Figure 4.1 provides the number as well as percentage of incubators based on sector focus. If the incubation facility has more than one stated focus areas, then it was counted under both the sectors. That's why the cumulative count of incubation facilities in Figure 4.1 is higher than the total number of incubation centers. As it can be seen, the largest proportion of incubation centers, close to two-thirds, support entrepreneurial businesses in agriculture and healthcare related areas. Availability of incubation facilities in this sector can be extremely helpful for the entrepreneur because this sector needs considerable investment in laboratory and equipment facilities which may be difficult for entrepreneurs. An incubation centre that provides the early stage entrepreneur access to centralized facilities will reduce the initial investment requirements for the entrepreneur. The second highest proportion (more than half) of incubation centers support enterprises in the ICT area. India has established itself as a leading country in the ICT sector in the last couple of decades, and the high growth prospects of this sector naturally attract a large number of entrepreneurs. The presence of large number of incubation centers that focus on the ICT sector is consistent with this underlying trend. Close to one-third of the incubation centers are either sector agnostic or do not have any stated focus areas. While this would mean that they could provide incubation support to enterprises in a variety of areas, they also suffer from lack of specialization, and might not be in a position to provide focused sector specific assistance. The number of incubation centers that 21

34 provide support for enterprises in engineering sciences, energy, manufacturing and infrastructure are lesser as compared to that of agriculture & healthcare and ICT sectors. 65 (41%) Number of supported Institutes 53 (33%) 49 (31%) 26 (16%) 20 (13%) 15 (9%) ICT Agriculture and Healthcare Engineering Sciences Energy Manufacturing and Infrastructure Others Figure 4.1: Incubators and the industry focus Host organizations and sector focus of the incubators Figure 4.2 provides the distribution of incubators classified on the basis of the host organization in different sectors. Several interesting observations can be made. First, the proportion of incubators that have stated ICT as a focus area does not differ considerably between the four broad categories - universities, non-universities, government, and private incubators. This indicates that this is a sector that is seen as equally important for all types of incubators. A higher proportion of incubators hosted by non-universities have indicated agriculture and healthcare as an area of focus as compared to incubators hosted by universities. This is an indication that specialized facilities and expertise are required for supporting start-ups in agriculture and healthcare, which are probably not available in universities as of now. It can also be seen that the proportion of "others" in the graph is significantly lower for incubators hosted by non-universities as compared to that of universities. This indicates that incubators set up in non-universities have clear focus areas, whereas those set up in universities are broad based and their focus areas are less well defined. While such a broad focus would help a range of entrepreneurs to quality for incubation support, having a well defined focus would enable the incubation centers to develop indepth expertise on these focus areas, which can help to provide a more effective support to the start-ups supported by the incubation centers. Our analysis also indicates that a higher proportion of incubators hosted in government organizations have agriculture and healthcare as one of their focus areas as compared to that of incubators hosted by private organizations. This is on expected lines, since there is a greater need for initial investments in R&D facilities, which a private sector might find it difficult to make. On the other hand, the proportion of private incubators who have indicated manufacturing and infrastructure as one of their focus areas is twice as that of incubators hosted by government organizations. Interestingly, the proportion of incubators that are sector agnostic or have not stated their focus areas clearly are higher among private organizations as compared to that of incubators hosted in government organizations. One would have expected the private sector to have more focus as compared to the incubators hosted by government organizations, but our results does not indicate that. 22

35 (A) Incubators hosted in universities (B) Incubators in government organizations ICT 15% 27% 25% Agriculture and Healthcare 4% 25% Engineering Sciences 9% 6% Energy 8% 13% 21% Manufactuing and Infrastructure 12% 35% Others (C) Incubators hosted in Non-universities (D) Incubators in private organizations 12% 20% 26% 22% 7% 11% 8% 9% 24% 41% Figure 4.2: Type of host organizations and sector focus 9% 11% Sector focus in different regions Table 4.10 provides the region wise proportion of incubators for different sectors. Some of the prominent trends are summarized below. Region ICT Table 4.10: Region-wise analysis of incubation focus areas Agriculture & Healthcare Engineering Sciences Energy Manufacturing & Infrastructure North 45% 34% 16% 13% 5% 29% North East 0% 25% 25% 0% 0% 50% East 29% 36% 14% 14% 7% 43% West 31% 47% 19% 13% 13% 31% South 31% 44% 15% 13% 11% 28% Others 23

36 Agriculture and healthcare account for the highest proportion of incubators in West and South, followed by ICT. However, in the case of North, ICT accounts for the highest proportion followed by agriculture and healthcare sector. This probably indicates that there are a lot more institutions that do research on agriculture and healthcare topics in West and South, as compared to North. Another interesting observation is the absence of incubators that have a clear focus on ICT in North East. While ICT has emerged as a key focus area of industry as well as academia across the country, North East seems to have been insulated from this development. However, it needs to be borne in mind that there are very few incubators in North East, and any inferences should be accompanied by the disclaimer of a low sample size Sector focus by type of city Figure 4.3 provides sector focus by type of city. Except in the case of energy sector, which also includes segments such as clean technology and renewable, there is no substantial heterogeneity in the sector focus between metro and non-metro cities. The proportion of incubators between metro and non-metro cities is around 30% for all the sectors except energy. It can be remembered that the overall distribution of incubation facilities between metro and non-metro facilities is also 30%. The possible reason behind incubators that focus on energy being predominantly located in metro cities is that research and innovation in this sector has been relatively recent, and is concentrated in a few institutes, which are largely located in metro cities. 100% 80% 8 60% % Non-metro Metro 12 20% % ICT Agriculture and Healthcare Engineering Sciences Energy Manufactuing and Infrastructure Others Breadth of focus of the incubators Figure 4.3: Sector focus by type of city We also tabulated the incubators by the number of focus sectors that they have indicated as their area of interest (Table 4.11). Information from 116 of the 159 incubators, which have indicated at least one of the five sectors as their focus area, were used in the analysis. It can be seen that 72 (62%) of the 116 incubators have indicated only one of the five sectors to be their focus. This indicates that there is a strong clarity among the incubators on the areas that they would like to provide support. 28% of the incubators have indicated two of the five sectors as their focus areas. The proportion of incubators that have indicated three or more of the sectors as their areas of focus is dramatically lower - indicating that most of the incubators (90%) restrict their focus to one or two sectors. 24

37 Analyzing the incubators classified on the basis of their host organizations, indicate that the proportion of those incubators that focus on only one sector is similar to the overall trend. Universities have a higher proportion of incubators that have a focus on two sectors, as compared to non-universities. This is in line with expectations - universities would like to offer incubation support to a larger cross-section of start-ups as compared to nonuniversities. Analyzing on the basis of the ownership of host organizations, it was found that a higher proportion of incubators hosted by private organizations have indicated two sectors as their focus areas as compared to incubators hosted by public organizations. This in a way is an unexpected finding - while incubators in government organizations would have been expected to have a broader canvas to make incubation support accessible for a larger cross section of start-ups, it is not the case. The sectoral breadth of private sector incubators is broader than that of public sector incubators. Table 4.11: No. of focus sectors indicated by the incubator No. of focus sectors indicated by the incubator Total Panel A: Host organizations classified on the basis of their status Total University Total Non-University Panel B: Host organizations classified on the basis of their Ownership Total Government Total Private Panel C: Overall Overall total Financial support to the incubating facilities This section presents an analysis of incubators based on the source of their financial support. While the incubators are physically present in the host organizations, the financial support to the start-ups in the incubators are provided by external bodies such as the government agencies. Incubation centers, in a way, serves as a channel for the start-ups to access such financial support. To access financial support, incubation centers send a financing proposal to support the start-ups, to the funding agencies. If the proposal to support the start-up is approved by the funding agencies, then the financing grant is released to the incubation centre, which in turn releases it to the start-up Incubators based on the source of their financial support The source of financial support to the start-ups in incubation centers was divided into three categories: central government, state government, private, and others, if adequate information was not available. Figure 4.4 provides the number of incubation centers based on the source of financial support. It can be seen that the Central Government agencies plays a dominant role in funding the incubation centers. This is a strong departure when compared to the trends seen in VC activity. VC investment is primarily driven by the private sector, whereas incubation investment is driven by the government. More than three-fourths (76%) of the incubation centers receive funding from government sources (both central and state government). Out of these, Government of India agencies provide support for 69% of the incubation centers, and the remaining 7% from state government agencies. This indicates that states have not yet taken to providing financial support to innovation and start-ups in a big way. As discussed before, the major Government of India bodies supporting incubation 25

38 activities in India are Department of Science and Technology (DST), Department of Biotechnology (DBT), Ministry of Micro, Small and Medium Enterprises (MoMSME) and Ministry of Information & Communication Technology. 109 Number of Incubators Central Government State Government Private Others Figure 4.4: Incubators by source of funding organization Private investment for incubation is fairly recent and only 13% of the incubation centers receive funding from private sector. The reason behind this could be the substantial risk associated with the early stage investment in the start-ups being incubated, which the private sector is not willing to assume. While private sector is often considered to be having better capacity in handling risk in their investments, it does not seem to be the case as far as incubation support is concerned. The broader objectives of the government also helps in providing generous support to start-ups. While the main objective of governments behind providing incubation support is to enhance growth and promote innovation that leads to economic development, private sector support, naturally, is focused on generating enough return on their investments Pattern of financing support received by incubation facilities in different regions Table 4.12 gives the geographical distribution of incubators based on the type of organizations that provide financial support to them. Table 4.12: Distribution of incubators in different geographical zones by funding institute Central Zone State government Private Others government North North-East East West South Bulk of the incubation centers (42%) that are supported by the central government agencies are located in the South. Given that the headquarters of central government agencies are located in Delhi and generally the decisions on which incubation centers and start-ups to support are made centrally, this indicates that physical distance from Delhi does not limit the ability to secure financial support. Since there are no general region wise quota fixed by the central government agencies to provide incubation support, this indicates that there are more applications from South that meet the selection criteria of the funding agencies as compared to any other region. This also indicates that for a more uniform distribution of incubation centers across different regions, the central 26

39 government agencies should actively promote their schemes in those regions where the interest to apply or the number of institutes that meet the selection criteria are lesser. The low number of incubators funded by state governments indicate that incubation support has not been taken in a big way by the different state governments. Being physically closer to the incubation centers and with a finer understanding of the local context, state governments can monitor and administer incubation support programs more effectively as compared to that of the national government. But given the low number of incubators supported by the state governments, it can be inferred that it is not a priority policy area for many state governments. Even the limited support for incubation is seen only in West and South regions. There is a clear need for increasing the support provided by state governments across the country to complement the efforts of the national government. Incubators supported by the private sector are higher than that of those supported by state governments. Such privately funded incubators are however present only in South, North, and West. The level of incubation activity is by itself low in North and North East, and whatever little there is, is solely supported by the central government. While different factors associated with these two regions might be a deterrent for outside private investors, local private investors can think of setting up and funding incubation centers as a way to support entrepreneurship and employment Pattern of financing support received by type of hosting organizations Table 4.13 indicates the number of incubators funded by different sources vis a vis hosting organizations of these incubators. Interesting trends could be observed. Table 4.13: Distribution of incubators on the basis of host organizations funded by different organizations Zone Central government State government Private Others Panel A: Host organizations classified on the basis of their status Total university Total non-university Panel B: Host organizations classified on the basis of their ownership Total government Total private Firstly, it can be seen that most of incubators funded by central government (79%) are set up in universities. However, such a strong preference to support university based incubators is not seen in the case of incubators supported by state government and private sector. In both the cases, the highest proportion of incubators are hosted by non-universities. It would be interesting to study which model of incubation support is most effective, university or non-university based. Additional studies is also needed on why private investors do not invest in university based incubators. Analysis on the basis of the ownership indicates that the funding support from central government organizations have more or less been equal between private and public organizations. This underlines the existence of an active public private partnership in implementing the incubation schemes of the central government. However, such parity could not be seen in the case of state government or private sector funded incubators. 75% of the incubators supported by state government are in government organizations, whereas 95% of the incubators funded by private sector are in private organizations. 27

40 Case Study IAN Incubator - Providing a growth platform for entrepreneurs Ajai Chowdhry The first generation entrepreneurs in India came from the IT sector comprising of young middle class well educated people. They created wealth not only for themselves but also for all stakeholders. This boom changed entrepreneurship and the role models in the country. More than just creating wealth, it built a huge level of self-confidence amongst the entrepreneur class. It created awareness in well-educated youths that there was an alternate career path, which is not only risk taking but wealth creation and value creation. It helped to contain the flight of knowledge and brains out of the country because people could now commercialise it here in India. The breed of successful entrepreneurs has spawned more and they are the biggest brand building activity in the country. One of the things is the ability for entrepreneurs to find a market, otherwise, entrepreneurship won't happen. Second, for entrepreneurs to grow, they need the right resources. Then there is infrastructure, which includes incubators and mentoring. In that sense India is a young entrepreneurial country. Indian Angel Network (IAN) was set up in 2006 to address these gaps and provide capital support and hand holding to budding entrepreneurs. IAN, India's first & Asia s largest business angel network, currently has over 200 members from across India & overseas, comprising the who s who of successful entrepreneurs, CEO s, as well as leading organisations such as Microsoft, Intel, Naukri, Sequoia, etc. The network looks to invest up to US$1 million with a sweet spot of US$ 500K across various sectors. I am an angel investor myself and as an investor, I am always keen to learn about the new age business models and opportunities that young entrepreneurs are working upon. The IAN platform is vibrant and helps the young entrepreneur not only seek investment but also receive guidance from angel investors from time to time. This is a unique platform to connect with network and explore network s network. IAN help aspiring entrepreneurs achieve their dreams. Ajai Chowdhry is the founder of HCL and is an investor with IAN In addition to the angel network, IAN has also set up an incubator platform (TBI Technology Business Incubator) with the support of Department of Science & Technology (DST), Government of India to foster entrepreneurship. With the creation of the IAN Incubator, IAN is in the unique position of spanning the entire venture creation ecosystem. The board of the IAN Incubator comprises of eminent and successful entrepreneurs like Mohit Goyal, Saurabh Srivastava and Vikram Kant Upadhyaya, and I am also a part of it. IAN Incubator is equity based incubator and has a unique model of an incubation leveraging relevant business & domain expertise of entrepreneurs for entrepreneurs & moving away from geographical boundaries. Angel members of IAN come forward and mentor the incubatee companies carefully selected at IAN Incubator. Such mentors are the strategy drivers for the incubatee company to take the vision of the entrepreneur forward and help the entrepreneur to convert the vision into an investable and profitable business. IAN Incubator focuses on a wide range of areas including IT, ITES, Internet/Web, Mobile VAS, Telecom, Retail, Education, Media & Entertainment, Manufacturing, Clean Technologies, etc. 28

41 During the course of incubation, we provide seed capital and other business assistance like IP strategy & protection; support in business planning; early connect to the market for obtaining customer validations; refining prototypes and running pilots; visibility & promotion of the venture; training & development to improve entrepreneur s skills; business support services at negotiated rates for legal, HR, IT, etc. The portfolio of IAN Incubator has grown to 23 incubatees with two successful graduations. The portfolio is spread across sectors such as telecom, robotics, automobile, security services, audio technology, social venture, education services, transportation services, financial services, social media platforms, retail services, and healthcare devices. IAN Incubator has received a grant from Technology Development Board (TDB), Government of India to disburse seed support to its selected incubatees. In less than six months of receiving this grant, IAN Incubator has allocated Rs. 8.5 million to seven companies. This is what some of the mentors have to say about the benefits of incubation scheme for their respective incubatee: Rajiv Mehta, Angel member "TDB seed support came as a life line for my incubatee company. It helped the founder in multiple ways. Gave him the funds needed to realise his dream, boosted his confidence and also proved as an encouragement for him and his peers, who have great ideas, but no way of knowing how to take them off ground. This industry needs the TDB kind of support for many more such entrepreneurs." Vishal Lalani, Angel member "Seed support through TDB has given a chance to my incubatee portfolio companies and their founders take their idea towards commercialisation. Experience from using these funds will be an invaluable learning experience for these youngsters; and there is also a chance that they can convert this into a successful business. The learning itself can turn out as important assets for our country, since these are the kind of people who are going to lead our country's economic growth" The seed support scheme has been offered to incubatee companies in different sectors such as telecom, robotics, automobile, audio technology, IT services, and retail services. Each of these companies has requested seed support for different activities to further support their idea and venture. One of the seven companies that had received this seed funding has already received two tranches of instalments after careful diligence on usage of the funds. This is what the entrepreneur has to say about the scheme, "The seed support from TDB has helped my venture a lot in moving closer to the end customers and making such a service available to them in an efficient way thus leading to a virtuous cycle of ever growing customer base." Some of our star incubatee companies have received angel investment of over Rs. 5 million in total. This has helped them to scale up their operations and build their team. There are some exciting companies that are being closely watched by the incubator team to bring them on to the angel platform of the IAN for angel investments. 29

42 4.3.4 Incubators and the number of schemes under which they have received support An incubator facility can receive funding support from more than one incubation support program. For example, one incubation centre can be supported by the incubation support schemes of both DST and MoMSME. When an incubation facility receives support from more than one source, the breadth of sectors that it can support is wider. Further, if a start-up can qualify to get under funding from more than one source, then the funding support that a start-up can access is also higher. Generally, there is no restriction on the number of sources from which a start-up can receive funding support and when a start-up receives funding from multiple sources, it is seen in a more positive light. While a start-up could receive support from different incubation centers at different points, it cannot receive funding support from the same source twice. For example, let's assume that start-up A is currently supported by incubation centre D. The incubation centre D receives support from scheme S and T. Through the incubation centre, the start-up A can obtain funding support from either scheme S or T or both. After some months, the start-up A leaves incubation centre D and starts to get support from incubation centre E, which channelizes funding support from schemes S, T, and U. If the above mentioned start-up had previously received support from scheme S or T or both, it would not be eligible to receive support under the same schemes in the new incubation centre. However, there is no restriction on getting support through scheme U. Table 4.14 gives the number of incubators and the number of schemes from which they receive support. Bulk (126 of the 159, i.e., about 80%) of the incubation centers support the start-ups through only one of the schemes. 18% of the incubation centers can provide financial support to the start-ups from up to two schemes. Only 4 out of the 159 can provide support from up to three schemes. As discussed previously, the overall proportion of incubators in universities and non-universities is 67% and 33% respectively. While this proportion does not change if we look at incubation centers that receive support from a single scheme, it changes when we look at incubators that receive support from two schemes. A higher proportion of incubators in universities receive financial support from two schemes as compared to non-universities. Number of sources of funding support Table 4.14: Incubators and the number of sources of funding support Incubator status Incubator ownership University Non university Public Private Total We also analyze the pattern based on the incubator ownership. The overall proportion of incubators in the public and private sector are 43% and 57% respectively. While this proportion does not change if we look at incubation centers that receive support from a single scheme, it changes when we look at incubators that receive support from two schemes. 55% of the incubators in public sector institutions receive support from two schemes, whereas the corresponding proportion is only 45% in the case of private incubators. It is thus felt that incubators in the universities / public sector are in a position to secure a larger amount of financial support to the start-ups as compared to those in non-universities / private sector. 30

43 4.4 Type of incubators This section provides an analysis on the type of incubation facilities. As discussed previously, incubators are classified into four categories - BI, TBI, STP, and STEP. Figure 4.5 provides the number of incubators for each category. It needs to be noted that an incubation centre can be classified into more than one category depending upon the funding source(s) that have approved the incubation centre. 93 Number of Incubators BI TBI STP STEP Figure 4.5: Number of incubators under different categories As shown in the diagram, almost 58% of the overall incubation facilities present in the country can be classified as BI's. These are the most generic type of incubators, and supports a variety of industry sectors. Ministry of Micro, small and medium enterprises (MoMSME) is the leading agency that has funded many of the BI's. The second largest type of incubators (almost 40%) are the TBI's. TBI's differ from BI's in terms of focus. While TBIs are strictly focused on enterprises driven by technology based innovation, BIs have a broader focus that would include supporting non-technology enterprises as well. Other major type of incubation facilities are the STP's and STEP's. They constitute 14% and 11% of the overall incubation facilities present in the country respectively. The difference between BI/ TBI and STP/ STEP is very subtle. While the objective of the former is to support start-ups in the early stages of their inception, the objective of the later is to promote entrepreneurship among the educated. In addition to providing financial support, they provide assistance in setting up of new enterprises. In line with this objective, they provide the new enterprises with incubation space, business and commercial expertise, and a nurturing environment to the entrepreneurs. Table 4.15: Split up of incubator types in different regions Region TBI BI STEP STP North North-East East West South Table 4.15 gives the distribution of the type of incubators in different regions. It can be seen that a large proportion (61%) of TBI's are located in South. Among all the incubation facilities located in the South, 55% are TBI's. However, when we look at the distribution of BI's, such a dominating trend could not be seen. Though the 31

44 largest numbers of BI s are located in the South (30%), the numbers in North and West (29% and 24% respectively) are not far behind. In all the regions, the BI's account for the highest proportion (almost two-thirds) of the incubators in the region. However, South is an exception - BI's constitute only 35% of the incubators in the region and the largest proportion are accounted by TBI's (48%). This shows the high emphasis given to technology based innovation in this South as compared to the other regions. STPs are located mainly in the West and South with almost 41% of such facilities present in each of these regions. However, STEPs are again quite evenly distributed. North zone has the majority of these parks with 41% of such facilities located there. South, east, and west zone have 29%, 18%, and 12% of these facilities respectively. Overall, the number of incubators in both these categories is much lesser than that of BI's and TBI's. 4.5 Summary This section was based on the analysis of a rich sample of 159 incubation facilities located across the country. The government governs most of the incubation facilities in India. Still their distribution is not as well diversified as one would expect them to be. The majority of these facilities are located in the southern region of the country. East zone and North-east zone are the most neglected regions as far as these facilities are concerned. Technology is the most preferred field when it comes to innovation. Consequently Information & communication technology and biotechnology, agriculture & health care are the most preferred focus areas for incubation facilities. Manufacturing and infrastructure is the least preferred sector in terms of incubation support. Central Government is the most dominant entity in terms of funding incubation facilities in India. State governments have not played an active role in formulating and implementing incubation schemes. In spite of government entities being the major funding and governance bodies for incubation facilities in the country, the majority of such facilities are hosted in private educational and non-educational institutes. Most of the incubation facilities present in the country are located in a few states. A well balanced distribution is expected from such facilities then is present, if we really expect them to make a significant difference in India. Incubation facilities are well distributed in different type and tier cities in India. They are not concentrated in well developed areas of the country. These facilities have a reasonable presence in Tier II and Tier III cities of the country. 32

45 5.0 Analysis of incubatees This section presents an analysis of the incubatees that are supported by various incubators. Out of a total of 159 incubators that formed the sample of incubators, list of incubatees was available for 40 of the active incubators. Together these 40 incubators have supported 1058 firms, which formed the basis of the analysis of this chapter. Our analysis indicated that this sample of 40 incubators had a profile that is quite similar to that of the total number of incubators analyzed in this report. It is therefore felt that the results of this analysis would be an adequate representation of the underlying trends seen among firms that receive incubation support. 5.1 Overview of incubation facilities Table 5.1 gives the broad indicators on the various support services provided by the incubators. On an average the incubatees are provided with office space of 949 sq. ft., which is the area of an average two bed room apartment in the Indian context. For a start-up firm, this is a reasonable amount of space to begin with. More importantly, functioning in an incubation facility gives substantial credibility to the incubatee firm. Thus, in addition to the physical facilities, functioning from an incubation facility provides various intangible benefits to the incubatee firms. The average period of incubation support has been 2.6 years, which can be considered as a reasonable timeframe for the incubatee to prove the worthiness of its idea and concept. Successful incubatees would be able to attract additional funding so that they can move to a larger premise and there is benefit in shutting down those businesses that are unlikely to be viable rather than continuing to support them. Constant churn in the incubatees housed in the facility would help in providing support to new companies. Our analysis also indicates an average incubation facility can support about 15 companies simultaneously. The presence of a reasonable number of peer group companies also helps the companies in the incubation facility to learn and benefit from each others' experiences. Table 5.1: Overview of support services provided by incubators Description Sample size Value Average floor area available for each incubatee (sq. ft.) Average period of incubation (years) Average incubation capacity (No. of companies) Growth in number of incubatees Figure 5.1 shows the cumulative estimated number of incubatees at the end of the year as a proportion of the total sample size. The slope of the curve gives an indication of the growth in the number of incubatees in the recent years. The curve has been estimated using the year in which the incubation facility has been established and assumes that the incubator supports an identical number of incubatees every year, which is equal to that of the activity indicator (defined later in the chapter). While the actual number of incubatees supported by the incubation facility would definitely vary with year, estimation such as the one attempted here would give a reflection of the underlying trend. Our results indicate that though the incubators have been in operation as early as 1988, the real growth in the number of incubatees actually began only after If we consider a time frame of about 25 years, 60 percent of the total incubatees are estimated to have been supported in the last five years, visa-vis 40 percent in the first twenty years. 33

46 100% 80% 60% 40% 20% 0% Year 5.3 Location of incubatees Figure 5.1: Estimated cumulative incubatees as a proportion of total sample size Distribution by region Table 5.2 shows the distribution of 1058 incubatees by region. The trend is somewhat similar to that of incubation facilities. East zone has registered the least number of incubatees. South is again on the top. More than half of the companies in our sample have received incubation support in this region. It can be seen that the proportion of incubatees in different regions more or less corresponds with the proportion of incubators in different regions in the sample. Region No of incubatees Table 5.2: Distribution of incubatees by region % of Total % of incubators in different region in the sample Average incubatees per incubation facility Average number of years in operation Average number of incubatees per operation year East 73 7% 5% North % 23% South % 55% West % 18% Total Table 5.2 also indicates the average total number of incubatees supported by the incubation centre in each of the regions. East has the highest value, but it needs to be remembered that the sample size is low for the region. This is followed by South and West, and subsequently by North. Since the average total number of incubatees per facility would also depend on the number of years that the incubation center has been in operation, the average number of incubatees per operation year has been calculated. This can be considered as an "activity indicator" of the incubation centre. 34

47 West has the highest value of the activity indicator, followed by North. East has the lowest activity indicator values, indicating that though incubators in the East region have been set up early, the number of incubatees supported per year is not very high. Excluding East, the activity indicator indicates substantial homogeneity between the regions. The activity indicator at the overall level is which is not very high. On an average, the number of new incubatees supported by the incubation facility is less than one per quarter. Since substantial increases in the activity indicator might be difficult to achieve, given the constraints on expanding the physical facility as well as the operational team of the incubation centre, increasing the number of incubatees would require an increase in the number of incubation centers Distribution by type of city Table 5.3 shows the distribution of incubatees by type of city. Interesting observations that could be made is that incubators have been operating in non-metro cities for a longer time as compared to that of metro cities. It can also be seen that the activity indicator values for incubators in non-metro areas are about 10% higher than that of incubators in metro areas. This indicates the important role of incubators in promoting entrepreneurship in smaller cities. City No of incubatees Table 5.3: Distribution of incubatees by type of city % of Total % of incubators in different city in the sample Average incubatees per incubation facility Average number of years in operation Average number of incubatees per operation year Metro % 25% Non-metro % 75% Total City No of incubatees Table 5.4: Distribution of incubatees by city tier % of Total % of incubators in different city in the sample Average incubatees per incubation facility Average number of years in operation Average number of incubatees per operation year Tier I % 25% Tier II % 32.5% Tier III % 42.5% Total Table 5.4 gives the distribution of incubatees for Tier I, II, and III cities. It can be seen that incubators in Tier II cities indicate a superior performance. They have been operating for more number of years and also have a high activity indicator value. On the other hand, activity indicator for incubators in Tier III cities is the lowest among the three cities and the difference is quite considerable when compared to the value of Tier II cities. This could be because of two reasons - the number of aspiring entrepreneurs in such cities is low or the institutions need capacity strengthening to support more number of incubatees. Additional studies are needed to determine the reasons behind this trend in order to take corrective action. 35

48 5.3.3 Distribution by type of host institution Table 5.5 gives the distribution of incubatees based on the host organization that is providing incubation support. The results present interesting trends. It can be seen that the incubation was initially set up in universities and the trend of dedicated incubation centers and incubation centers being set up in non-universities is a more recent phenomenon. It can also be seen that there is not much difference in the average years of operation between private and public sector incubators. In terms of activity indicator, it can be seen that incubators at nonuniversities have a higher value as compared to university incubators. This is by and large on expected lines - the main objective of universities is to engage in teaching and research, and setting up of incubators is at best considered as a supplementary activity. On the other hand, incubators at non-universities focus on providing incubation support in a more targeted manner, which results in a higher activity indicator value. City Central university State university Private university Subtotal university Private nonuniversity Government non-university Subtotal nonuniversity Subtotal public Subtotal private Table 5.5: Distribution of incubatees in incubators classified by type of host organization No of incubatees % of Total % of incubators in different host in the sample Average incubatees per incubation facility Average number of years in operation Average number of incubatees per operation year % 35% % 10% % 35% % 80% % 15% % 5% % 20% % 50% % 50% Total Between private and public, the former shows a higher activity indicator as compared to the later. This can again be considered to be on expected lines and the reason can be attributed to private sector efficiency. Within the university category, central universities have a higher activity indicator value as compared to that of private universities, but the difference is not very large. Since many of the central universities are top ranked institutions, they attract better quality students and faculty. They also have a strong focus on research activities. To attract good quality students and retain talent, many of these institutions have policies that encourage entrepreneurship. Combination of these factors could be the reason behind central universities having a higher activity indicator value. State universities, have a low value in comparison to both central and private universities, indicating that most state universities do not really have a strong focus on providing entrepreneurship support. In the non-university category, the activity indicator in government institutions is considerably higher as compared to that of private sector non-universities. Though the sample size of public sector non-universities is less, this is a 36

49 bit of a surprising result, since one would have expected the private sector institutions to have a higher activity indicator value. The results indicate that while the private sector has a better activity indicator value as compared to that of public sector, it is only just so. On the other hand, the activity indicator values differ considerably between incubators in universities and non-universities, with the later having considerably higher values. The inference is that setting up more incubators in private non-universities would have a better impact in increasing the companies that are being incubated. 5.4 Focus of incubatees Distribution of incubatees based on sector focus Just like incubators, we also analyzed the incubatees in terms of the sector in which they operate. The incubatees companies have been classified in eight categories based on their focus area. The sector information was available for 835 incubatees out of the sample size of Figure 5.2 shows the distribution of these incubatees in different sectors. First of all, IT & ITES is the dominant sector with more than one-third of the incubatees being in this sector. It indicates the high level of entrepreneurship activity in this sector. Incubatees in Healthcare & life sciences category account for the second highest proportion. Analysis of the support provided by incubators indicated that healthcare and life sciences was an area of focus for the highest number of incubators. However, since IT&ITES accounted for the largest proportion of incubatees, it can be inferred the level of entrepreneurial activity in the Healthcare & life sciences sector is not as high as that of the IT&ITES sector. 21, 3% 7, 1% 75, 9% 74, 9% 46, 5% 284, 34% IT & ITES Healthcare & Lifesciences Non-financial & consumer services Engineering & Construction Telecom Media & Entertainment 124, 15% 204, 24% Manufacturing Transportation & Logistics Banking & Financial Services Figure 5.2: Sector wise distribution of Incubatees But put together, IT & ITES and Healthcare & life sciences account for more than half of the total incubatees. As it can be seen this trend from the 2009 report, the trend seen in incubatees is very different from the trend seen in VCPE investment. Region wise analysis indicated that the dominance of these two sectors was uniform in all geographical regions except West. IT & ITES in particular has a strong presence in all these three regions, with almost two-fifth of the overall startups who have received incubation support operating in this sector in each of the regions. In the West, entrepreneurship activities are much more diversified and almost similar numbers of 37

50 incubatees are present in all the major sectors like IT, healthcare & life sciences, consumer services, and telecommunication Host organizations and sector focus of the incubatees The distribution of incubatees in terms of their sector based on the host organization of the incubator is given in Figure 5.3. As we can see, there is substantial heterogeneity in the incubatee sector for the four host institution categories. One interesting observation is that incubatees supported by incubators in universities/ public sector are much more diversified as compared to that of incubators in non-universities /private sector. In the latter two categories, almost two third of the incubatees are accounted by just two sectors - IT & ITES and Healthcare & life sciences. This can be due to the fact that these two sectors have shown exponential growth in past one and a half decade, are known to have prospects of higher returns. Healthcare & life sciences in particular has very moderate presence in universities and government institutes. On the other hand, it is the most dominant sector in non-government institutes and private incubation facilities. IT & ITES Healthcare & Lifesciences Non-financial & consumer services Engineering & Construction Telecom Media & Entertainment Manufacturing Transportation & Logistics Banking & Financial Services Incubatees supported in Universities Incubatees supported in Non-universities 10% 11% 7% 2% 1% 39% 3% 3% 0% 4% 6% 13% 22% 16% 14% 49% Incubatees supported by Government 3% 1% Incubatees supported by Private Sector 3% 2% 1% 11% 8% 34% 5% 7% 34% 13% 13% 16% 14% 35% Figure 5.3: Incubatee sector by incubators in different host organizations 38

51 5.4.3 Sector focus of incubatees by type of city Figure 5.4 indicates the proportion of incubatees in different sectors in metro and non-metro cities. Though the proportion of incubatees is higher in non-metro cities in all the sectors, there is a variation in the proportion among the sectors. For example, the proportion of incubatees in Banking & financial services and Transportation & logistics sectors are slightly higher in incubators in metro cities as compared to other sectors. This could probably be due to the fact that the main markets for these two sectors are largely in metro cities. In the same way, the proportion of incubatees in Healthcare & life sciences and Manufacturing is the lowest in metro cities. This trend could be attributed to the reason that the cost of resources needed for doing business in these two sectors are probably higher in metro cities, and therefore a higher proportion of incubatees are in non-metro cities. 100% 80% % % Non-metro 20% 0% Metro 5.5 Graduation of incubatees Figure 5.4: Sector wise distribution of incubatees by city type As discussed previously, incubation support is provided only for a fixed duration to the incubatees. At the end of the incubation period, the incubatees are expected to graduate from the incubation centre. While the status of graduated incubatees i.e., whether they are still existing, or have obtained additional funding from VCPE investors, etc., is not widely available, the information on graduation per se would give scope for interesting interpretations. In our sample of 1058 incubatees, 294 have graduated. This indicates a graduation ratio of 28%, indicating that over one-fourth of the incubatees have exited the incubation centers. We consider this as a healthy ratio, and gives opportunity for new companies to avail incubation support. Since the growth in the number of incubatees is seen only in recent years, it is expected that the graduation ratio will further improve in coming years. Table 5.6 gives the graduation ratio for different classifications of incubators. When the incubators are classified by type of city, the graduation ratios are more or less similar. When the incubators are classified by city tier, it can be seen that incubators in Tier II cities have a higher graduation ratio as compared to that of incubators in other two 39

52 tiers. A superior performance of incubators in Tier II cities was also seen in terms of their activity indicator. Additional studies are needed to understand the causal factors behind this. When classified by region, graduation ratio is way ahead for South as compared to the other three regions. Surprisingly, the graduation ratio of West is the lowest. When incubators were classified on the basis of their host institution, it can be seen that the graduation ratio is higher for incubators in non-universities as compared to that of universities. This is again on expected lines because of their strong focus on incubation, incubators in non-universities are able to manage the process of incubation in a better manner as compared to that of universities. Similarly, private sector incubators have a higher graduation ratio as compared to that of public sector incubators, which again could be attributed to private sector efficiency. Table 5.6: Graduation ratio of incubatees Description Graduation ratio (A) Incubator classified by type of city Metro 26% Non-metro 28% (B) Incubator classified by city tier Tier I 26% Tier II 33% Tier III 23% (C) Incubator classified by region East 16% North 18% South 39% West 10% (D) Incubator classified by host institution Central university 17% State university 32% Private university 34% Subtotal university 26% Government non-university 41% Private non-university 30% Subtotal non-university 34% Subtotal public 23% Subtotal private 33% 5.6 Summary Though the incubators have been in operation as early as 1988, the real growth in the number of incubatees actually began only after If we consider a time frame of about 25 years, 60 percent of the total incubatees is estimated to have been supported in the last five years, vis-a-vis 40 percent in the first twenty years. The activity indicator at the overall level is which is not very high. On an average, the number of new incubatees supported by the incubation facility is less than one per quarter. Since substantial 40

53 increases in the activity indicator might be difficult to achieve, given the constraints on expanding the physical facility as well as the operational team of the incubation centre, increasing the number of incubatees would require an increase in the number of incubation centers. Activity indicators for incubators in non-metro areas are about 10% higher than that of incubators in metro areas. This indicates the important role of incubators in promoting entrepreneurship in smaller cities. Similarly incubators in Tier II indicate a superior performance. They have been operating for more number of years and also have a high activity indicator. While the private sector has a better activity indicator value as compared to that of public sector, it is only just so. On the other hand, the activity indicator values differ considerably between incubators in universities and non-universities, with the later having considerably higher values. The inference is that setting up more incubators in private non-universities would have a better impact in increasing the number of companies that are being incubated. Incubatees supported by incubators in universities/ public sector are much more diversified as compared to that of incubators in non-universities /private sector. In the latter two categories, almost two third of the incubatees are accounted by just two sectors - IT & ITES and Healthcare & life sciences. When incubators were classified on the basis of their host institution, it can be seen that the graduation ratio is higher for incubators in non-universities as compared to that of universities. This is again on expected lines because of their strong focus on incubation, incubators in non-universities are able to manage the process of incubation in a better manner as compared to that of universities. Similarly, private sector incubators have a higher graduation ratio as compared to that of public sector incubators, which could be attributed to private sector efficiency. 41

54 Perspectives Technology Business Incubation - Harbinger of IPR driven innovation in India Deepam Mishra The innovation challenge In a busy meeting room at the Indian Institute of Management Ahmedabad, a large group of senior managers and CEOs got together to discuss strategies for accelerating technology innovation in India. The meeting chair is not satisfied with a linear growth improvement, and wants exponential change. During this day-long, high-energy session, several experts shared their experiences from the past decades and outlined the opportunities and challenges. The meeting concluded after an interactive discussion on what can be done now, not in the future. The overall mood was very upbeat, in part due to a large percentage of youngsters, many of whom were talking about creating billion dollar start-ups in India. While this sounds like a large corporate strategy session, it was actually an annual retreat planned by the DST for their Technology Business Incubators (TBI's). The future is certainly bright, but challenging. India at innovation cross-roads Undoubtedly, India has seen unprecedented innovation and growth in its services sector over the last 2 decades. However that engine is beginning to slow down. As the opportunities for labour arbitrage get tighter, Indian companies may sacrifice margins to sustain revenues. A new engine of growth is required. Globally, the value of companies creating novel and unique products, is significantly greater than that of services companies, by a factor of 10! For example an IT services company needs about 100 times more people to generate the same profit as a Silicon Valley product innovator. Innovation is equally critical for social progress. India s future rests on solving everyday challenges of water, energy, food - for which international solutions may not suffice. Innovation occurs in the environment of its need. Take for instance, off-grid energy. Western style solar PV farms may not be viable for much of India due to space and capital cost hurdles. However simpler solutions with specifications matched to local requirements, may be viable, as has been exemplified by SELCO (Bangalore) that makes a profit even selling PV to the extremely disadvantaged. It is in this context that TBI s have a unique opportunity and role. Deepam Mishra is the CEO of i2india/ Technovate India, a public-private incubator Innovation occurs in start-ups Globally, the SME sector is the source of 90% of breakthrough-innovations, as it has the least to lose by changing status-quo. Some of the largest companies in the world such as Microsoft, Google, Apple, were until recently start-ups. While India s track record of product innovation is limited, she enjoys a large, young and entrepreneurial workforce, along with mature capital markets. We only need some catalysts in this space to kick-start the revolution. Government schemes to setup TBI s across the breadth of the country recognizes this opportunity. 42

55 State of TBI s in India While most observers and many industry insiders talk about unmet promises and a bleak and challenging scenario, I see a mixed picture. TBIs are typically housed within educational and research institutes. These institutes are evolving from a pure research and teaching mindset to one that includes translational research. The culture at these places is changing at a dramatic pace, but cultural changes are always slow. The current generation of leadership and researchers, has been thrown at the deep-end of the ocean of global competitiveness and IPR-regimes. This, after the country spent about 50-years of post-independence existence in encouraging these same institutions to reverse-engineer global technologies to reduce imports. Against this background, our institutes are doing remarkably well. The young researchers, many of whom have worked overseas and are globally connected, are not satisfied with the old methods of knowledge for knowledge sake and want to see their work impact the real-world. These researchers are growing in numbers and confidence, and are providing the key push from within the system. Finally, India is evolving its own unique paradigm of technology commercialization as she is very sensitive to the use of public-funded research for pure private profits. The model evolving in India will have a better balance of these priorities than has been seen in the Western contexts. Hard road ahead The road ahead is not only hard, it is also non-existent in many places. While I will name just the key challenges, there are a lot more. There is a dearth of early-stage investors willing to take technology risk, as there are very few successful entrepreneurs who typically turn into investors later. The incentive system for researchers in many prestigious institutions does not explicitly reward innovators for attempting translational research especially if it fails due to market reasons. And finally, the TBIs are mostly run under the umbrella of the university culture which is starkly different. A much more exciting environment of risk and reward is required to create an attractive career path for aspiring TBI executives. The good news is that most TBI managers and educational leaders are trying to bring about requisite changes. Many universities are setting up Private-Public funds, many are inviting ex-industry executives to oversee operations etc. However, much more still needs to be done. Boot-strapping is possible, indeed necessary While India s model and experience will surely be different, there are several positive examples around the world that show that it is possible to bootstrap local eco-systems that breed technology innovation, entrepreneurship and business/ social impact. One such example is the Imperial College s experience in creating a very successful eco-system in London over the last 15 years. Taking a bold break from the past, Imperial College allowed its TBI to gain independence, hire industry executives and raise private VC funds, even to the point of reducing Imperial College to a minority ownership. The result has been a vibrant eco-system that has created over 100 technology start-ups, 300+ licensed technologies, and a very large group of passionate innovators. I have personally witnessed that despite these great challenges and lack of clear incentives, our scientists are creating world-changing technologies. Unfortunately, most of this work is not validated and hence sitting on their shelves. With the right mix of policy changes, operational autonomy to TBIs and risk-taking, the full innovation potential of our TBIs can be unleashed. 43

56 Section C: Angel Investments 6.0 Overview of angel investment process 6.1 Introduction Angel investors are unique in their own way, and in recent years, have emerged an important source of capital for young entrepreneurs and start-up businesses. Angel investors (also known as business angels or informal investors) are usually high net-worth individuals (HNIs) who invest risk capital in start-ups in expectation of high returns. Angels also form groups or networks to facilitate their investment activities in a more collaborated and organized manner. Angel groups or angel networks are associations of angels that share research and resources in terms of investment. They usually pool their capital, much like venture funds for investment. As a startup firm grows, the requirement of capital also increases. In the initial stage of idea generation, and research and development, the amount of funding required is relatively low. It is usually in the magnitude of hundreds of thousands. At the start-up stage, it is very difficult for an entrepreneur to get investment from external investors. Funding at that stage is usually from founders, with the support of family and friends, also known as 4F funding (founder, family, friends, and fools). Once a firm is established successfully, it can approach VC firms for its financing requirement. The issue here is that most VCPE firms focus on making investments that are only above a certain threshold level, which in India is about INR million. When entrepreneurs of startup firms are not able to obtain additional funding from their 4F sources, they have to resort to external sources of capital. Bank financing remains difficult to access for most young entrepreneurs because of the general need to provide collateral to loans. Angel investors have emerged as a preferred source for such entrepreneurs whose funding requirement are below the threshold limit of VCPE investors. Most of the angel investment deals in India are in the magnitude of INR million. 6.2 Characteristics of angel investments Angels invest in a wide range of sectors, however, technology based sectors are more popular among them. The usual trend is, angels not only provide financial support to the firms, but also provide management support and network to help them grow. For this reason, most of the angels prefer to invest in sectors where they have expertise. Since many successful first generation entrepreneurs in India have been from IT and telecom based sectors, it is not surprising that these are the popular sectors among investors. It remains to be seen whether the sharing of expertise in the past six years due to the formation of angel networks would change this trend in the future. Angel investments are characterized by several unique features. The money invested by angels in startups is their own money, unlike VCPE firms where investments are made from a pooled source of capital and the fund managers of such firms have fiduciary responsibilities to the investors who have provided capital to the fund. The magnitude of funding by angels is lower as compared to VCPE firms. Angels invest in a firm strictly in the start-up stage, and mostly in firms started by young entrepreneurs. VCPE funds are available at different stages of the firm lifecycle, but they usually invest more in later stages, as per our findings in previous reports. One possible reason is that first of all, VCPE investors prefer to invest in large scale, and requirement of funds is relatively higher for a firm in later stages of growth. VCPE funds are in fact not only limited to start-ups, and even established firms can avail 44

57 them for requirements like expansion or new project development. Some of the angels are also driven simply by the idea of supporting entrepreneurship activities and contributing to the development of entrepreneurship, in the sense that financial returns are not the sole driver for their investment decision making. Angel investors also share a clear difference in approach from incubation facilities despite the fact that both are intended to provide support to start-ups. The scale of financial support provided by angel investors to start-ups is higher as compared to that of incubators. The most important difference lies in the structure of the two systems. Angel funding is more oriented towards financial support with some degree of management and expertise support and network sharing by the investors. Incubation facilities on the other hand are created with the very motive of providing 360 degree support to entrepreneurs for their growth. Financial support is just one in the list of many support services provided by incubation centers. Another difference is that angel funding is largely a private investment, whereas incubation facilities in India are still very much dominated by government in terms of funding. Financial returns is an important criterion in angel investing. By contrast, financial returns is not a key priority for incubation support, at least in the government supported incubation activities as these facilities are usually not-for-profit organizations working with the motive of encouraging entrepreneurship activities in India. 6.3 The funding process The funding process in an angel investment usually starts with the entrepreneur approaching a prospective angel investor. While the process of identification of suitable candidates for support is not easy for investors, it is also not an easy task for an entrepreneur to approach an angel without any prior contacts. The emergence of angel networks have made this process much easier and organized. The entrepreneurs can now approach angel networks to facilitate the process of finding an interested investor. The proposals submitted by entrepreneurs undergo an initial screening process by the network. Based on the prospective growth of the projects, they are then presented to the angels interested in investing in the sector in which the project is based. A strong business idea is needed to get the attention of the investors, who are seasoned professionals and entrepreneurs. Apart from the idea, execution is also equally important. The entrepreneurs should come up with a good business and marketing plan to implement that idea. The presence of a good management team at the start-up is crucial at this stage. The presence of experienced experts in the management team can provide an added possibility to the chances of the firm getting support. Based on mutual interest, the angel network then arranges a meeting between the entrepreneur and the angel investor. If the angel finds the idea appealing enough, they usually perform a due diligence as to how the funds provided by the investors are going to be utilized. Here again the entrepreneurs should have a clear thought process regarding why they need the funds for. A rigorous due diligence process is also beneficial for the firm, as it helps the fund management process in the company much more organized. Satisfactory outcome of a due diligence results in an investment. Angels can also consider making a second round of investment based on the progress achieved in the first round of investment. While early stage investing creates opportunity for high expected returns, it also comes with the provision of the low probability of the success of the start-up. Unless warranted, angels do not interfere in the operations and management of the company which they are funding, and provide them only with advisory and financial support. They try to respect the fact that the business is the idea of the corresponding entrepreneur, and he or she is expected to have a better vision regarding how it can be implemented so as to reap its benefits to the fullest. They however keep a constant track of the performance of the company. Usually they take a seat in the board to monitor the progress. The extent of their involvement depends on the terms agreed upon between angels and entrepreneurs at the time of funding. Their role can be that of a part-time advisor, full time advisor, mentor, or 45

58 management executive of the company. In some rare cases, angels acquire the majority control of the start-up firm. Angel investments give the start-ups a lot of leverage in terms of funds, but also keep them under constant watch. As long as they are performing as per expectations, angels do not interfere in their operations more than what was agreed upon. However, if angels feel that the performance of the firm is not as expected and/ or their investments are going bad, they could take strong measures to protect their investment. The common intervention is to replace the founders of the firm with their own management team to ensure better operational efficiency from that point onwards. This technique however has the tendency to backfire, as the new management takes additional time to become familiar with the business of the company. In many cases the reason for the bad performance could be shortage of capital. In such scenario, the angels try to help the startups with more funds of their own, or with the help of some new investors. This step is however not that easy as the poor performance of the firm makes it unattractive for new investors. Exit methodologies used by angels are very similar to that adopted by VCPE firms - mergers & acquisitions and public listings are the most common methods used. Sometimes if there is no scope for the startup to recover in near future, the angels would sell the assets of the firm to at least recover their initial investments. In such unfortunate circumstances, they usually end up killing the essence of the great idea that was behind the foundation of the firm. Angels may not share the same emotional attachment with the firm that the entrepreneurs have. Many entrepreneurs opine that such external monitoring makes them more disciplined, which in turn helps in improving the efficiency of their firm. 6.4 Evolution of angel financing in India Though angel investment has been happening in India for a long time in the form of private investment in the shareholding of companies, it was not known by that name. Angel investment, in the form and process as it is known today, is a more recent development - that evolved with the growth in entrepreneurship and VCPE financing. A significant milestone in the development of angel investment in India was the formation of Indian Angel Network in With the establishment of more such networks in different parts of the country over time, angel funding became more organized and diversified. Another initiative which has successfully worked to fill the gap between angels and entrepreneurs is the creation of match-making websites in recent years. Some notable names here are Venture Giant, Investment Network, India Venture Board, etc. These websites serve as a common platform where entrepreneurs and investors can find each other as per their requirements and interest. Despite all these facts, angel investing in India still has a long way to go. This field is still in a nascent stage. Investors still suffer from the basic limitations like localization of available opportunities. Most of the angel investment is only centered in large cities and are yet to reach the interior cities where the need for financing and mentoring requirements from entrepreneurs are even higher. Also, angel investment largely occur in ventures or businesses where there is a substantial technology component. It is hoped that such imbalances would get corrected as the angel investment scenario matures in India. 6.5 Regulation and government incentives Government of India could also consider incentivizing angel investment to promote entrepreneurship. In developed countries like US and UK, where angel investment is a relatively older concept, governments provide tax credits to high net worth individuals to promote such investments. So far, the Indian government has been conservative in announcing such concessions. On the contrary, government has stipulated various disclosures 46

59 before such investments are made. For example, to counter the allegations that angels invest black money in startups, government has made a mandate that the angels must disclose the source of their funds when they are making any such investments. Although these norms are not unreasonable, they can still create a slowdown in angel investment activities. The second major act of Government of India that can go against such investments is the provision of Startup Tax in the recent budget. Angels provide funds to entrepreneurs in return of equity stake in the company. The investments are made at a valuation and not at par considering the high growth prospects of these firms. The new amendment states that, "a company, not being a company in which the public are substantially interested (nonlisted companies), receives, in any previous year, from any person being a resident, any consideration for issue of shares. In such a case if the consideration received for issue of shares exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares shall be chargeable to income tax under the head 'Income from other sources'." 7 However, this provision shall not apply where the consideration for issue of shares is received from a VC company or a VC fund. Clearly, most of the companies funded under angels will fall in this category. This extra tax burden on start-ups in case they receive angel funding is another factor which will make angel investments attractive for entrepreneurs. The angel investment industry in India still has a long way to go. It is hoped that the government would usher in suitable changes in the existing regulatory regime in the near future which would give a fillip to angel investments in entrepreneurial firms. 47

60 Opinion Angel investments: Risk capital to drive India's entrepreneurial engine Padmaja Ruparel India needs to create million jobs per year for the next decade and entrepreneurship is crucial for such large-scale employment generation. Entrepreneurship converts job seekers to job creators. Being innovation-driven, it will also help generate solutions to India s myriad social problems including high-quality education, affordable health care, clean energy and waste management, and financial inclusion. Entrepreneurship-led economic growth India has the potential to build about 2,500 highly scalable businesses in the next 10 years, generating revenues of $200 billion, which will require at least 10,000 start-ups to be bred. However, risk capital is critical to drive this entrepreneurial engine. 1. Angel investors: This is very high quality investment where high net worth investors invest in quality start-ups. But angel investing is very nascent in India with only about 500 investors and estimated investment of about US$22 million in In comparison, angels in the US invested about US$30 billion in Venture capital: Over the last 5 years, early stage VC's have invested about US$1 billion in early stage companies in India. This is miniscule. In the same period, US early stage VCs have invested over US$26 billion. 3. Debt: Banks and financial institutions are very wary of investing in start-ups in the absence of collaterals and low credit ratings are a huge disincentive for providing seed/ early stage financing. The most critical component of risk capital is from angels as they not only provide capital but also act as great scouts of emerging ideas, helping them scale at a stage where institutional seed and venture funds would typically not invest. They breed companies and nurture them for the next round investors VC's and debt providers. For instance in the US, angels invested about US$30 billion in close to 60,000 companies in 2007; in the same year, VC funds invested a little under US$25 billion in close to 4,000 companies. This is the pyramid which is critical for breeding entrepreneurship and innovation. Padmaja Ruparel is the President of Indian Angel Network The concept of Angel Investors, was first referred to individuals who helped funding Broadway Entertainment several decades ago. In today s world, angel investors continue to play a similar role. Leading companies in the world like Google, HP, and Amazon, received initial investment from angel investors. In fact, the fabled Silicon Valley entrepreneurial eco system s major contributors are angel investors, as they seeded the companies which VC's subsequently funded and helped to create leading ventures. 48

61 In India, angel investing was brought to India by the Indian Angel Network, in Indian Angel Network (IAN), India's first and Asia s largest angel network, with over 200 investors, brings together successful entrepreneurs and CEOs who share a passion to enable more early stage businesses to create scale and value. By focusing on start-ups, IAN addresses the current acute lack of funds available to early stage companies. IAN believes that early stage businesses require more than just money to succeed. They require close mentoring and inputs on strategy as well as execution. These investors share a passion for entrepreneurship which creates value and wealth. Angel investing is the highest risk and highest gain asset class in an investor s portfolio. Investors invest in a promise that what the entrepreneurs' project can be achieved. The only tangible thing that a venture is likely to have is the entrepreneurial team on which the investor can lay his bet on. More often than not, there will be none or very few customers, no cash flows or assets, and an idea that may just be taking a tangible shape. Therefore the investors look for not the best of the best, but best of the next. And then explore ways of mitigating/ reducing their risks. And this can be best done by investing through angel groups or investors coming together to choose their investments. The advantages of investing through an angel network are manifold: a larger deal flow; ability to invest over a larger number of ventures across sectors; opportunity to leverage fellow investors domain expertise, networks, and mentoring; and the existence of a good angel network secretariat that reduces the cost of investing. This is far better than individual investing as the risk just increases manifold. Growth prescription for angel investments For this private investment class of risk capital to grow, it is imperative that this new class of investment be recognized. Angel investor groups need be encouraged as they can drive high quality money to genuine investment. Some critical steps could spawn many more networks : 1. Accreditation of angel investor groups so that genuine investors' money can be leveraged for unlisted start-ups/ early stage companies with investors investing up to Rs. 50 million (US$1 million) per venture or Rs. 100 million (US$2 million) collectively per venture 2. Angel investor groups should be allowed to create limited liability partnerships to be used as intermediate investment vehicles with a tax pass through effect. 3. Angel investors invest tax paid money and their investments should get tax exemption like 100% tax exemption up to Rs. 10 million (US$200,000). Many countries like Singapore, US etc. provide such incentives to angels to encourage investment in start-ups. 49

62 7.0 Analysis of angel investments This section presents the analysis on angel investments in India. Two types of analysis are being done - one, on the angel investments, and two, on the angel investors. The information available on both angel investments and investors are less descriptive as compared to VCPE investments for a variety of reasons such as: Most of the companies that have received angel investments are in a very early stage; The companies operate in 'stealth' mode, and do not wish to make public on the nature of the business till they have fully developed their business model; The companies are private companies and there is no regulatory requirement on them to disclose data about themselves publicly; The angel investors are individual investors investing their private wealth, unlike VCPE investors who invest in a fiduciary capacity. An angel investment is a private decision, and many investors do not disclose their investment details for commercial and other reasons; In several instances, the angel investors do not disclose their investment details to protect the interests of the investee companies. For the above reasons, the analysis of angel investments and angel investors has been restricted to a few broad parameters that could be easily obtained. The analysis, however, provides interesting findings, which we believe provides an appropriate representation of the underlying trends in the segment. As more information on angel investments become available in public domain, we hope that we would be able to provide a more comprehensive analysis in the future. 7.1 Description of data Angel investments A total of 185 angel investments, which were completed till June 2012, were included in this analysis. While the actual number of angel investments could be many times this number, it is believed that the sample provides an adequate representation of the underlying trends in angel investments. The list of angel investments was obtained from the database source Venture Intelligence, as well as angel networks such as Mumbai Angels, Indian Angel Network, and Chennai Angels. While the Venture Intelligence database had information on various angel investment deals by the angel networks, the information obtained directly from the angel networks helped in cross-checking the correctness of information in the database. The composition of angel investments sample is given in Table 7.1. It can be seen that out of the 185 deals, 39% of the deals have been facilitated by the different angel networks and the remaining 61% have been by angel investment organizations and individual investors totaling more than 40. Given the large number of investors, it is felt that the sample would be representative of the angel investments that occur in India. The angel investments were analyzed on the following characteristics: sector, the type of city, and the region in which the investee company was located. The same classifications and categories that were used for analyzing incubation schemes were used to analyze the angel investments as well. 50

63 Table 7.1: Composition of angel investments sample Investor group No. of investments Hyderabad Angels 3 Indian Angel Network 23 Mumbai Angels 36 Chennai Angels 7 Global Super Angels 3 Other organizations and individual investors 113 Total Angel investors A total of 458 angel investors were included in this analysis. These investors are members of various angel networks such as Super Angels, Indian Angel Network, Chennai Angels, Hyderabad Angels, and Mumbai Angels. While the actual number of angel investors would be far higher than the 458 included in the analysis, the analysis was restricted to the investor members of the above angel networks as details about individual investors who are not part of the network are not widely available. However, it is felt that the sample analyzed in this report would adequately represent the angel investors in India as well those interested in making investments in India. Table 7.2 gives details of the number of investors from different angel networks in the sample. Investor information in these networks were obtained from the websites of these networks as well as from the respective network secretariat. Table 7.2: Composition of angel investors sample Investor network No. of investors Chennai Angels 28 Hyderabad Angels 20 Indian Angel Network 188 Mumbai Angels 82 Super Angels 163 Overall total 458 The profiles of angel investors were analyzed on the following dimensions: Gender: Investors were classified as men or women based on their gender Education: The subject in which they acquired degrees/ qualifications were captured. Broadly, the subjects were divided into four categories: Science & Engineering, which included all science (including economics), mathematics, and engineering disciplines; Arts & Commerce, which included all arts, commerce, and related subjects such as languages; Business & Management, which included degrees in business and management related disciplines; and Professional qualifications such as chartered accountancy, law, financial analyst, etc. If the investors had degrees and qualifications in more than one category, both were captured. In addition, information on whether they were received their degrees and qualifications abroad were also recorded. 51

64 Work experience: The nature of their work experience was also noted. Broadly, the work experience was categorized into three: Professional - if the investors had worked in other corporate organizations; Family Business - if they were managing their family business; and Entrepreneurial - if they had experience in starting and running their own businesses. If they had experience in more than one form of work experience, all the categories in which the investors had work experience was noted. In addition, whether the investors had experience of working abroad were also recorded for analysis. Years of work experience: The number of years of work/ professional experience of the investor was recorded where the information was available. Industry sector experience: The main industry or sector in which the investor had professional experience was also recorded. While many of them had the experience of working in many sectors in their long professional lives, only that sector in which they were last associated with or the sector in which they had most years of experience was used in the analysis. Alumni of IIT/ IIM/ IISc: These are premier institutes of learning in India. In order to analyze the impact of the alumni of these institutes in the growth of entrepreneurship, we also noted whether the investors were alumni of these institutes. 7.2 Trends in angel investments Time trend in angel investments As expected, the number of angel investments has increased in recent years. Table 7.3 indicates the year wise number of investments in the sample. It needs to be noted that the number of investments in 2012 is not for the full year, but only till June Despite a reduction in the number of investments in 2010, there has been a steady growth in the number of investments. The last four years ( ) account for 64% of the investments in the sample as compared to the 36% in the earlier period. Table 7.3: Year-wise number of angel investments Year No. of companies Before Total 185 With more and more individual investors expressing interest in making angel investments, this growth in trend is likely to continue in the future. As compared to a sample of 458 angel investors analyzed in this sample, the sample size of investments is only 185. This indicates that there are several virgin angel investors who are yet to 52

65 make their first investment, after considering the fact that there are several investors who have already made multiple investments. While it is also understood that more than one angel investor might have invested together in a single venture, based on our familiarity with the data we feel that there are several virgin angel investors who are waiting to make their first investment City wise distribution in angel investments Figure 7.1 provides the distribution of angel investments by type of city. Analysis on the basis of metro/ non-metro classification indicates that more than 80% of the companies that have received angel funding are in metro cities. This indicates that angel funding has largely been restricted to entrepreneurs who are in the six metro cities. In a way, the pattern of angel investments is very similar to that of VCPE investments in India. Our previous study indicated that 78% of the firms that receive VCPE investments are in metro cities. 8 The conclusion is the same if the analysis is done on the basis of city population. The number of investments in Tier 3 cities is less than half of that of Tier 2 cities. It is thus felt that though the phenomenon of angel investments have grown substantially in recent years, the growth is largely restricted to the larger cities. Measures have to be taken to ensure that this type of risk capital is available and accessible to the vast majority of entrepreneurs even in smaller cities. 11; 6% 36; 19% Total Metro Total Non Metro 25; 13% Tier 1 Tier 2 Tier 3 149; 81% 149; 81% Figure 7.1: City wise distribution of angel investments Table 7.4 gives the number of angel investments in the six metro cities. It is seen that Bangalore has the largest number of angel investments, accounting for more than one-third of the investments in metro cities. Bangalore is followed by Mumbai, which accounts for about 28% of the number of investments. It is thus seen that angel investments are not uniformly distributed in the six metro cities. The two cities of Bangalore and Mumbai account for 62% of the total investments in metro cities. Table 7.4: Angel investments in six metro cities City No. of companies Bangalore 50 Chennai 22 Delhi 21 Hyderabad 13 Kolkata 1 Mumbai 42 Total metro

66 Similar to the trend seen in other segments of VCPE, Kolkata has almost no companies that have received angel investment. Chennai, Delhi, and Hyderabad occupy the third, fourth, and fifth position respectively. It is interesting to note that while the cities Chennai, Delhi, Hyderabad, and Mumbai have their own angel networks, Bangalore does not have one. Despite that shortcoming, Bangalore has the highest number of angel investment. There are several explanations possible for this trend. First, angels are open to invest in companies that are not proximally located. While past studies have shown that angels invest in companies that are located closer to where the angels live, they could be more open now to invest in companies that are not in the same city where they live. Second, there could be angel investors in Bangalore who make investments directly rather than through an angel network. However, it is felt that setting up of angel networks does promote angel investment in the city, going by the examples of Chennai, Hyderabad, Mumbai, and Delhi. Pune, one of the larger Tier 2 cities, also has a city based angel network and has a total of 19 angel investments. It can thus be seen that there is a strong correspondence between the setting up of angel networks and the growth in the number of angel investments Region wise distribution in angel investments Figure 7.2 gives the distribution of angel investments in the four geographical regions. The results are on expected lines. South accounts for close to half the total number of angel investments in the sample. This could be because of the fact that South has three metro cities - Chennai, Bangalore, and Hyderabad. As the angel investments are concentrated in metro cities, this could explain the higher share of South in the distribution of angel investments. Between, North and West, the proportion of the latter is more than twice that of the former. This indicates that relative access and availability of angel capital is higher in the West as compared to the North. 2; 1% 32; 17% 65; 35% East North South West 86; 47% Figure 7.2: Region wise distribution of angel investments Sector wise distribution of angel investments We also analyzed the number of angel investments in the different sectors. Table 7.5 gives the results. It can be seen that bulk of the angel investments are concentrated in three sectors, viz., IT&ITES, Non-Financial and Consumer Services, and Telecom, Media & Entertainment. Taken together, these three sectors account for 88% of the total number of angel investments. Several explanations can be provided for this trend. First, if angel investment is seen as funding innovation and new business models, it is possible that much of the recent business innovations is largely concentrated in these three sectors. By comparison, it can be seen that VCPE investments is more evenly distributed between various sectors. 9 54

67 Table 7.5: Angel investments in different sectors Sector Deals % of total Banking & Financial services 7 4% Engineering & Construction 2 1% Healthcare & Life sciences 6 3% IT & ITES 57 31% Manufacturing 4 2% Non Financial & Consumer Services 73 39% Telecom, Media & Entertainment 33 18% Transportation & Logistics 3 2% Total 185 An unexpected result is the high proportion of companies in the non-financial and consumer services segment that have received angel funding - in fact, the largest number of companies that have received angel investments are in this sector. Second, as we will see in the analysis of angel investors, most of the investors have professional experience in these sectors and therefore they prefer investing in those sectors that they understand. Third, the quantum of start-up funding needed in these sectors is not that large as compared to other sectors that are more capital intensive. Since the amounts of investment in angel rounds are not very high, other sectors where the startup capital needs are much higher do not get the attention of angel investors. Fourth, the technological component is these three sectors are much higher as compared to other sectors - even retail businesses are substantially driven by technology. Such businesses are not in a position to secure funding from traditional sources such as banks. Angel investors form a valuable source of capital to such companies. Table 7.6: Cross tabulation of angel investments (percentage) between sectors and regions Sector East North South West Banking & Financial services 3% 3% 5% Engineering & Construction 2% Healthcare & Life sciences 50% 2% 5% IT & ITES 31% 29% 34% Manufacturing 3% 2% Non Financial & Consumer Services 50% 47% 37% 38% Telecom, Media & Entertainment 16% 21% 15% Transportation & Logistics 3% 1% 2% To check, whether there has been substantial variation in the distribution of angel investments between different sectors in the different regions, a region wise analysis was done. Table 7.6 gives the results. It can be seen that the distribution in South is distributed across many sectors, as compared to the other regions. However, if we exclude East, because of very low sample size, it can be seen that, the top three sectors remain the same in all the three regions. But the relative proportion accounted by the three sectors varies between the regions. For example in North, Non Financial & Consumer Services sector accounts for close to half of all the investments in the region. The number of investments in IT&ITES and Telecom, Media & Entertainment is only about two-thirds and one-third 55

68 respectively of the investment in Non-Financial & Consumer Services sectors. Such large variations in the number of investments in the top three sectors are not seen in South and West. 7.3 Profile of angel investors Gender and nationality Table 7.7 gives the split-up of investors in our sample by gender. It can be seen that the number (and proportion) of male investors are higher than that of female investors. While the result in itself is on expected lines, it is felt that the proportion of male investors is higher than what one would have expected. The common reasons behind this result could be: (1) Since professionals become angel investors only after many years of work and achieving success through leadership position in their careers, the proportion of women who might not have reached such positions could be lower. (2) Men could have a higher appetite to make such risky investments as compared to women. Additional research needs to be done to analyze the causal factors behind this trend. However, it is felt that an increase in the proportion of women angel investors would also increase the diversity of companies that are getting angel investments. Table 7.7: Angel investors - by gender No. of investors % of total Women 22 5% Men % Total 458 Figure 7.3 gives the split up of investors by their nationality. Information on nationality of the investors was available for 397 of the 458 investors. An investor was classified as a foreigner if the investor did not have any experience of living or working in India. By the same token, investors who had spent part of their lives in India and had subsequently immigrated overseas, were still classified as Indian. Since it is generally believed that angel investors invest only in those companies that are in geographical proximity, the finding that 11% of the investors in the sample are foreigners is a little unexpected. This indicates the interest among overseas angel investors to invest in entrepreneurial businesses in India. It also indicates that angel investment patterns have changed in recent years, and they are no longer restricting their investments only to businesses that are closer to where they are located. 44, 11% 353, 89% Foreigner Indian Figure 7.3: Distribution of angel investors by nationality 56

69 7.3.2 Educational background The profile of angel investors in terms of their educational background was also analyzed. Results are given in Figure 7.4. Panel A gives the proportion of investors who have had their education abroad. It can be seen that close to two-thirds of the sample have studied abroad. This indicates that a majority of the investors are well aware of the global trends and practices and could have an outlook that is influenced by their studies abroad. Panel B indicates the proportion of investors who are alumni of the leading institutes such as IIT's, IIM's, and the IISc. More than one-fourth of the investors in the sample have been alumni of these reputed institutions. Though the numbers of such premier institutions are just a handful as compared to the total number of educational institutions in the country, a substantial percentage of the angel investors have been alumni of these elite institutions. This underlines the contribution of these institutes to the growth and development of entrepreneurship in India. (A) Educated abroad (B) Alumni of IIT, IIM, IISc 121, 34% No 101, 26% No Yes Yes 240, 66% 281, 74% Figure 7.4: Educational background of angel investors 100% % 60% % Yes No 20% % Science & Engineering Arts & Commerce Business & Management Professional qualifications Figure 7.5: Subjects in which angel investors have earned degrees Figure 7.5 gives the results of the analysis done based on the subjects in which the investors have obtained degrees. It can be seen that a large proportion of the investors have obtained degrees in Science & Engineering and Business & Management subjects. Since angel investors invest only in those businesses that they understand, their background influences the companies that they invest in. As it was observed in the previous section, most of the angel investments are either in technology sectors or in sectors that have strong linkages with technology. Less 57

70 No. of investors India Venture Capital and Private Equity Report 2012 than 20% of the investors have degrees in Arts & Commerce subjects, indicating that angel investments have largely been the preserve of those having technology and business qualifications. A surprising finding is the low proportion of investors having professional qualifications such as law, chartered accounting, etc. While there are several highly successful wealthy professionals, not many seem to be involved actively with angel investing Professional and work background Figure 7.6 indicates the proportion of angel investors who have worked in locations outside India. Work location information was available for 363 investors among the 458 in the sample. The results indicate that 60% of the investors have worked abroad. Thus it can be seen that a substantial proportion of angel investors have had a global exposure, either in terms of studying or working abroad or both. Such rich professional experience can be an asset to those companies in which they are investing. Thus, apart from being wealthy, angel investors in India on the whole are well qualified, have sophisticated educational and professional experience, and have a global exposure. 219, 60% 144, 40% No Yes Figure 7.6: Proportion of angel investors who have worked abroad Up to 10 years Between 11 to 20 years Between 21 to 30 years More than 30 years Years of work experience Figure 7.7: Analysis of angel investors by years of work experience (as at 2012) Figure 7.7 gives the histogram of angel investors based on the years of work experience, estimated with respect to It can be seen that the highest proportion (close to 50%) of the investors have professional experience ranging between years. This has an interesting implication. If we assume that on an average, individuals start their career at 25 and retire by 60 (give or take a few years), the average career span is 35 years. When people become angel investors after about years of professional experience, it indicates that they would have substantial years of professional careers ahead of them and are going to be in the active phase of their professional life. This could mean that they can actively track, add value, and monitor their angel investments 58

71 which can be very beneficial to the investee companies as compared to passive investors. On the other hand, it could also be possible that they might be very involved with their professional careers, leaving very little time to track and monitor their investee companies. Entrepreneurs need to be diligent on choosing the right angel investors for their companies. The results also indicate that many of the angel investors are in the age range Though there might be wealthy individuals beyond the age of 55, not many of them are actively into angel investing. It is only those in the middle years who are considering angel investing in a serious way. Table 7.8 gives the primary sectors in which the investors have professional experience. The analysis has been done for the entire sample as well as for the individual networks. At the overall level, IT&ITES sector accounts for the largest proportion, followed by the Banking & Financial Services sector. The other sectors that account for a good proportion of investors are Telecom, Media & Entertainment and Non-financial & consumer services. The remaining sectors account for a negligible number of investors. It goes without saying that the professional experience of the angels will influence the kind of companies that they provide funding to. This is also evident from the analysis of angel investments most of the angel invested companies are in IT & ITES, Telecom, Media & Entertainment, and Non-financial & consumer services sector. Sector Table 7.8: Distribution of angel investors on the basis of professional experience All Indian Angel Network Mumbai Angels Super Angels Hyderabad Angels Chennai Angels Banking & Financial Services 28% 18% 34% 39% 15% 25% Engineering & Construction 2% 1% 5% 1% 5% 7% Healthcare & Life sciences 1% 1% 2% - 10% - IT & ITES 31% 42% 15% 21% 55% 46% Manufacturing 8% 10% 23% 1% 10% 4% Non-financial & consumer services 14% 16% 7% 14% - 14% Telecom, Media & Entertainment 14% 11% 13% 22% 5% 4% Transportation & Logistics % - - Others % - - Details not available 1% 2% - 1% - - Total investors It can be observed that a substantial proportion of angel investors have professional experience in the Banking & Financial Services industry (BFSI). A large number in this category are those who are working in VCPE funds and investment banks. This explains the reason as to why there are not many angel investments in the BFSI sector. Though VCPE industry and investment banking can be considered as a part of the BFSI sector, investors from these sectors are essentially looking for opportunities in other industries to invest. A very positive aspect to the large number of investors from the financial services industry is that the familiarity and network of contacts of these investors can help the entrepreneurs in raising subsequent rounds of capital. A shortcoming is that the investors from BFSI sector might not have hands-on operational experience that can benefit the entrepreneur. An interesting aspect of our finding is the heterogeneity in the professional experience between the different angel networks. In the case of Indian Angel Network, Hyderabad Angels, and Chennai Angels the largest proportion of investors have professional experience in the IT & ITES sector. However, in the case Mumbai and Super Angels, the largest proportions of the investors have experience in the BFSI industry. Similar differences could be noted 59

72 for other sectors as well. For example, Mumbai Angels network has a higher proportion of investors who have experience in the manufacturing sector as compared to other networks. Likewise, Super Angels have a higher proportion of investors who have experience in the Telecom, Media & Entertainment sector. It can also be seen that the proportion of investors with experience in the Non-financial & consumer services sector is comparatively lower in Mumbai Angels and Hyderabad Angels. It is possible that such diversity could be due to the nascent nature of these networks. As the angel networks mature, it could attract investors from other sectors as well. On the other hand, if such diversity persists, it could influence the type of companies that get angel funding from these networks and the nature of post-investment contribution by the angel investors to the investee companies. For example, an entrepreneur who is keen on tapping the expertise of angel investor for raising additional capital would be better off approaching Mumbai Angels or Super Angels as they have higher proportion of investors who have professional experience in the BFSI sector. Contrastingly, an entrepreneur in the IT & ITES sector desiring technical expertise from angel investor would be better off approaching Indian Angel Network, Chennai Angels, or Hyderabad Angels. Figure 7.8 shows the distribution of investors based on their background. The largest of number of angel investors have professional experience of working in other corporations, followed by those who are entrepreneurs themselves. A result that stands out is the low number of the traditionally wealthy and those engaged in family business making angel investments. Out of the total sample of 453 for which background information was available, about 40% had both professional and entrepreneurial experience. This indicates that many successful professionals and entrepreneurs in the current generation are keen to support and develop entrepreneurship and are comfortable with the risks associated with such early stage investing. This is an encouraging development for prospective entrepreneurs since investors with professional and entrepreneurial experiences would be in a better position to empathize with the challenges faced by the entrepreneur. The entrepreneurs can also benefit from the learning of the investors in their professional careers. 7.4 Summary Figure 7.8: Number of angel investors by background Legend: A: Professional; B: Entrepreneurial; C: Family Business There has been a steady growth in the number of angel investments. The last four years ( ) account for 64% of the investments in the sample as compared to the 36% in the earlier period. 60

73 Analysis on the basis of metro/ non-metro classification indicates that more than 80% of the companies that have received angel funding are in metro cities. This indicates that angel funding has largely been restricted to entrepreneurs who are in the six metro cities. Bangalore has the largest number of angel investments, accounting for more than one-third of the investments in metro cities. Bangalore is followed by Mumbai, which accounts for about 28% of the number of investments. It is thus seen that angel investments are not uniformly distributed in the six metro cities. The two cities of Bangalore and Mumbai account for 62% of the total investments in metro cities. South accounts for close to half the total number of angel investments in the sample. This could be because of the fact that South region has three metro cities - Chennai, Bangalore, and Hyderabad. As the angel investments are concentrated in metro cities, this could explain the higher share of South in the distribution of angel investments. Bulk of the angel investments is concentrated in three sectors, viz., IT&ITES, Non-Financial and Consumer Services, and Telecom, Media & Entertainment. Taken together, these three sectors account for 88% of the total number of angel investments. 11% of the angel investors in the sample are foreigners. This indicates the interest among overseas angel investors to invest in entrepreneurial businesses in India. It also indicates that angel investment patterns has changed in recent years, and they are no longer restricting their investments only to businesses that are closer to where they are located. Close to two-thirds of the angel investors have studied abroad and about 60% of the investors have worked abroad. Thus it can be seen that a substantial proportion of angel investors have had a global exposure, either in terms of studying or working abroad or both. A substantial proportion of angel investors have professional experience in the Banking & Financial Services industry. A large number in this category are those who are working in VCPE funds and investment banks. A very positive aspect to the large number of investors from the financial services industry is that the familiarity and network of contacts of these investors can help the entrepreneurs in raising subsequent rounds of capital. The largest of number of angel investors have professional experience of working in other corporations, followed by those who are entrepreneurs themselves. The number of traditionally wealthy and those engaged in family business making angel investments is comparatively lower. 61

74 Case Study Catalysing angel investment: The example of Mumbai Angels Anil Joshi India, the second largest populous country, which had been growing at over 6% Y-o-Y, offers great entrepreneurial opportunities. Though India has been attracting large investments from VC and PE, it was slow on early stage investments. Recent growth in angel investments and the spread of angel networks across India, has definitely increased the availability of start-up financing in India. While angel investment in practice, were individuals have supported many ventures in personal capacity, has existed for centuries, the emergence of angel investors group as a powerful source of financing for high-growth companies has materialized only in the past 5 years in India. In addition to the rapid growth, the segment is becoming more formalised and organized through the creation of angel groups and networks. In addition to the money provided, angel investors play a key role in providing strategic and operational expertise for new ventures as well as social capital (i.e. their personal networks). Angels generally invest across a wide range of investment categories of which PE represents, on average, only a few per cent of their total portfolio. It is said that typically angels invest in a company which can reached within an hour s journey of their residence. But in India, contrastingly, angels do not see geographical proximity as much of constraint and they have been investing across India irrespective of their location. They stay invested in the company for a period of 3-7 years before exiting the investment, or the venture failing. Rates of return on angel investments vary depending on the year of the calculation and the period over which the returns are estimated. Some speculate that the returns are similar to the VC sector, others that the returns are higher due to the greater risks of earlier stages. In achieving their returns, their lack of sophistication in investing is balanced by the commercial knowledge which they provide to their investee firms. Figure below illustrates a typical investment cycle and the phase at which angel investment occurs in a company life cycle. Anil Joshi heads the operations of Mumbai Angels Illustration: Typical investment lifecycle for a firm 62

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