When Entrepreneurs Turn Investors: The Pros and Cons

entrepreneur investors

Everybody, at some point in life, needs a guardian angel to lend a helping hand and steer them through the pitfalls. Startups also need a guardian angel, especially in their early stages, to get off the ground.

For young entrepreneurs who are still too small to be noticed by VCs and have run through most of their own money trying to take off, having an angel investor betting on their idea is a blessing. Although India is the third most prolific startup ecosystem in the world, barely 1% of the startups that set up shop here get any kind of funding in the early stages, apart from their own sources or family and friends.

To add to their woes, of late, venture capitalists have become extra cautious with their money post the splurges of the past years, due to poor performance by many startups, including the unicorns. In such a scenario, there is little probability for the early stage startups to attract institutional investors who prefer later stage funding.

It has been noticed that quite a few ex-corporate honchos as well younger entrepreneurs who are running prominent startups are taking a keen interest in other early stage startups. These entrepreneur investors are bridging the funding gap by providing seed funding to even large funding (anywhere between Rs. 50 lakhs to 6 crores) for many fledgling startups.

It cannot be just for the money alone that these entrepreneurs are helping other entrepreneurs out, given that startups are the riskiest class of businesses. While Narayan Murthy has been investing in ‘inspirational’ startups through his private investment firm, Azim Premji has been fostering high-potential startups through his private equity firm. Ratan Tata too has been actively investing his personal money in startups he believes in.

Amongst the current generation of entrepreneurs, Naveen Tiwari, Founder, InMobi, likes investing in disruptive ideas and has at least 20 startups in his portfolio. He got started when some of his own staff resigned to start their own ventures and he decided to empower them in their entrepreneurial journey. Even Ola Cabs, at its very early stages, got seed funded by Snapdeal’s then founders after a meet up at an event. As Mukesh Bansal, Co-founder of Myntra, who also invested in startups says, “It’s not about deploying money alone, but about knowing what new ideas people are coming up with”.

There are many obvious advantages to having experienced entrepreneurs running high growth companies invest in a newbie startup:

  1. Entrepreneur investors have the added advantage of bringing their own vast experience, industry contacts and insights into their relationship. A lot of them mentor their younger startups as not only does this secure their investment, but also gives them exposure to new technologies, concepts and products which can drive the future business environment. For new startups, this kind of guidance holds as much value as the money, as it helps them to build up and scale faster than on their own.
  1. Entrepreneur investors are more likely to invest in what is truly valuable and path breaking than regular investors. Regular investors tend to flock towards the flavour of season and are unable to place value on standalone ideas which have the potential to change how things are done. Entrepreneurs being visionaries by nature are better able to spot the right talent.
  1. Entrepreneur investors are quicker in identifying, deciding and executing their investments with young startups. Most of them rely on their gut to decide on their choice for investment. Career investors take too long to come to a decision to invest the kind of time which a startup doesn’t have. Even if they come to a decision, they either invest too little or demand a large piece of the equity pie. So, even new founders tended to stay away from such investors.

It is still early days for such angel entrepreneur early stage investors to make billions by investing in such startups. Here are some downsides of being an entrepreneur investor:

  1. In view of the recent struggles and infamous exits by the founders of Flipkart and Snapdeal, in their own ventures, the protégés that they have invested in might be seen in a disadvantageous light by future investors. Maybe they were wrong to look too soon at new horizons before scaling up and stabilising their own organisations to a safe and stable level. However, since such instances are only exceptions, it shouldn’t deter  startups from reaching out to other entrepreneurs because the insights and mentoring that these startups get from entrepreneurs who’ve already ‘been there, done that’ far outweigh the cons.
  1. The more successful entrepreneurs are genuinely motivated to invest in a bid to improve the entrepreneurial ecosystem in India.  Yet, VCs tend to feel a certain conflict of interest with these entrepreneurs becoming investors and poaching for startups with potential in the same domain. But it also means that they are compelled to be more open minded about investing in disruptive startups without playing it too safe, lest the angel investors seize the opportunity and walk away with potential unicorns in the making.

In the Silicon Valley, it has been observed that 40% of the partners in VC firms were themselves former entrepreneurs or executives at startups. In the Indian context a similar pattern is expected to emerge more strongly in the near future.

It’s a heady business, where once bitten by the entrepreneurship bug, there’s no getting away from the thrill of scaling new frontiers, whether as an entrepreneur or as an entrepreneur investor!

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