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Budget: Entrepreneurship and Angel Investing need encouragement

File photo of Prime Minister Singh receiving the Report of the Task Force on Micro, Small and Medium Enterprises from its Chairman and Principal Secretary to Prime Minister, T.K.A. Nair, in New Delhi on January 30, 2010. Then Minister of State of Micro, Small and Medium Enterprises Dinsha J. Patel, the Secretary (MSME) Dinesh Rai and then Finance Secretary Ashok Chawla are also seen.
File photo of Prime Minister Singh receiving the Report of the Task Force on Micro, Small and Medium Enterprises from its Chairman and Principal Secretary to Prime Minister, T.K.A. Nair, in New Delhi on January 30, 2010. Then Minister of State of Micro, Small and Medium Enterprises Dinsha J. Patel, the Secretary (MSME) Dinesh Rai and then Finance Secretary Ashok Chawla are also seen.

Small and Medium Enterprises (SMEs) form the backbone of any economy, even the most developed ones. Studies indicate that over 90 per cent of the companies in the United States have less than 50 employees and more than 50 per cent of exports from the US are done by companies with less than 20 employees.

In India, Micro, Small and Medium Enterprises (MSMEs) constitute one of the most employment-intensive segments of the economy, contributing significantly to the manufacturing output and national exports.

It is estimated that this sector accounts for about 45 per cent of the manufacturing output and 40 per cent of the total exports of the country. There are several steps that the Government can take to encourage entrepreneurship and the growth of such ventures, especially by providing access to capital.

Globally, SMEs raise funds from "business angels" and then by seed or early stage venture funds before the general venture capital (VC) or private equity (PE) funds come in. Angel funds and venture capitalists are critical for the growth of MSMEs and the government needs to take some steps to enable the growth of both.

Business Angels in India are a new phenomenon and, therefore, need serious encouragement through the creation of an enabling policy environment that would also result in attracting more successful business people into becoming "Angel Investors".

Business Angels are successful CEOs or entrepreneurs who have "been there, done that" and the presence of such groups is critical to the entrepreneurial ecosystem because in addition to the funds, they provide the SMEs with mentoring, advice, guidance and help in accessing markets and creating the right organizational structure.

Globally, Angels bring in risk capital, valuable advice, mentoring and provide access to their own powerful business networks. This often makes the difference between the success and failure of a SME.

So, for a thriving MSME sector we need to create a policy environment that would encourage the creation of more seed funds or early stage funds. This can be done by:

Getting higher equity participation to facilitate better debt-equity mix;

Encouraging MSMEs to go global and increase their exports;

Entering into foreign technical collaborations for improving competitiveness.

In the past few years, there have been some attempts by the Government to promote flow of angel or venture capital funds to the MSME sector through Small Industries Development Bank of India (SIDBI).

Once the funds are set-up or for the funds already in existence, some broad policy issues need to be addressed, for channelizing risk capital to the MSME sector. Some of these issues are:

Change in bank lending norms for innovative start-up firms and introduction of new and innovative debt instruments that focus on the company’s assets such as receivables and IP (as against other pure physical ones or personal guarantees).

Provide access debt funds even without a 3-year operating history of a company.

Ensuring better cycle time for loan processing.

Allowing domestic angel or venture capital funds in a Limited Liability Partnership (LLP) structure with a tax-pass through status.

Availability of above structure to business angel groups (say a business angel group with at least 75 investor members).

Providing a tax write off for individuals, up to a limit (Rs. 5 crores per annum), investing in MSMEs, either through an early stage fund (corpus up to Rs. 500 crore) or through a business angel group or individually.

Providing the same tax write off for individuals / business angel groups investing in SMEs spawned by the government’s incubator system or coming out of the Incubators formed in the PPP model or IITs and other R&D Institutions.

The government could have a program on the lines of the highly successful Yozma scheme which was responsible for triggering off early stage funding in Israel, by using some public funds to create more early stage venture funds in the public private model. Similarly, some public funding could be used to help spawn more business angel groups in the country to complete the entrepreneurial ecosystem for nurturing SMEs.

Setting up of a separate SME Exchange or platform in an existing Stock Exchange to provide exit route to an angel or venture capital investor, along the lines of AIM, UK.

Allowing listing of angel/venture capital funds on the existing Stock Exchanges: This is critical as such funds invest in a seed stage company which is unlikely to be able to go public or be large enough to be acquired in 3 to 5 years. However, the typical portfolio of 15 or 20 investee companies of such a fund would collectively have the required valuation net worth and listing the fund would provide a return to the investors thus encourage more such funds to come up.

Besides this there are non-financial issues like liability of an individual Director on the Boards of angel or venture capital Fund which need to be addressed.

About the author:

Saurabh Srivastava
Saurabh Srivastava

Saurabh Srivastava is Founder of Indian Angel Network, a group of nearly 150 investors focused on funding early stage investments. He is Chairman of CA India. He has worked extensively in the US, UK, India and Singapore and has held senior executive positions with leading companies such as IBM and Unisys before becoming an entrepreneur and then a VC.

He founded one of India’s most successful and trend setting software companies, IIS Infotech Ltd.. IIS was publicly listed in India and post merger with Xansa, listed on the London Stock Exchange. He was Executive Chairman of Xansa India and served on the Xansa plc. board.

He has currently retired from both positions. He has since helped found several start- ups in the IT, Entertainment and many other fields. He is a co-founder and past Chairman of NASSCOM and past Chairman of the Indian government’s Electronics and Computer Software Export Promotion Council.

He has a Masters from Harvard , a B Tech from IIT and his awards include Distinguished Alumnus from IITK,.

Indian Angel Network: A Backgrounder:

Indian Angel Network (IAN), founded in 2006 by successful entrepreneurs like Saurabh Srivastava, Mohit Goyal, Pradeep Gupta, Raman Roy, Harish Mehta, Jerry Rao, Pramod Bhasin, Arvind Singhal, Hemant Kanakia, Alok Mittal among others, nurtures the entrepreneurial ecosystem by offering Angel funding to budding entrepreneurs.

IAN members are the who’s who of Indian entrepreneurs and dynamic CEOs who represent thought leadership across multiple sectors.

Besides looking at investment opportunities for wealth creation, the IAN members are keen to mentor entrepreneurs, share their experience and wisdom with young men and women with innovative, scalable and differentiated ideas/propositions.

The entire process of dealing with requests for funding new ideas to investing, nurturing and exiting (early Stage Investing) has been formalised, tried and tested over the last four years.

IAN now has a membership of over 140 members—both individuals and institutions, with about one-sixth of them located outside India. With investible funds of tens of millions of dollars, IAN members look to fund up to $1 million with an average of about $400-$600K and expect to exit in about 3-5 years.

So far IAN has funded about 23 ideas, including 4 outside India, and have made five successful exits, with a recent exit giving a 5x return in 15 months.

The membership of IAN spans successful Indian entrepreneurs and dynamic CEOs with high credibility and image on one hand and a passion and conviction to help young innovators with good propositions ideas.

IAN today has operations in Delhi, Mumbai, Bangalore and Pune. This brings entrepreneurs closer to IAN, apart from connecting with IAN investor virtually from anywhere.

The Network has now established a unique incubator program bringing IAN members together with a large pool of mentors to help innovators and entrepreneurs create ventures.

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