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December 28, 2015

Is there Any Downside to Active Entrepreneurs Making Angel Investments?

In an article titled "The Curious Case of Entrepreneur-Angels", Santosh Sreedhar of Avalon Consulting and Neeraj Gupta of Excubator explore whether the founders Flipkart, SnapDeal, CommonFloor, etc. should be turning Angel Investors "even as their core venture has still not turned around profits". Extracts:

However, there are a few who believe the trend should not be encouraged as it distracts the entrepreneur from the core business, which in many cases is still not profitable. They feel that even though some of these entrepreneurs have “made money”, many are still to prove their capability to “build businesses”. As one leading VC put it - “Its not a business if its not profitable”. They argue that such investments are bound to distract the entrepreneurs from focusing on turning their core business profitable.
Putting a clause in the term sheets restricting entrepreneur investments in outside ventures is not a norm in India or elsewhere. However, disclosure rules require entrepreneurs to keep the Board informed if such investments are being made. Entrepreneur investments in conflicting opportunities are not encouraged, but those in synergistic opportunities are often encouraged by the Board.
This is a topic that I've discussed with some entrepreneur-angels as well. My conclusion:  Especially in the Internet & Mobile sector, where change happens very rapidly, the angels who can spot opportunities and also add the most value (at least, tactics wise) are probably those that have "been there & done that most recently" - ie the Entrepreneur -Angels.

I was talking to couple of such recently. One of them said he is only investing in those ventures that address a gap in the market that he, through his existing and previous venture, has clearly spotted a need for. The other entrepreneur said, once he makes the investment - unless the founders of the investee companies scream for help - he does not bother to track them closely. In both cases, they averred the investments did not distract them from their primary venture. And, given how savvy most of the new generation entrepreneurs are (including wrt investor relations), I did not find any reason not to take them at their word.

From a VC perspective too, this trend should be good news. A couple of years ago, among their main problems was the lack of a pipeline of "well cooked" startups - for them to cut $1-M+ cheques for. And the perennial problem of lack of exit opportunities. Given how busy the bigger startups have been in acquiring their smaller VC-backed peers, the Entrepreneur-Angels are solving both of these problems for VC investors!

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