Keiretsu Forum Helps Angels Take Wings

“I think we have just dipped our toe in the ocean, not even in the river. There is so much more distance to go,” says Rajan Srikanth, co-President, Keiretsu Forum, Chennai & Singapore.

The Keiretsu Forum in Chennai has just completed a year and Srikanth, the driving force behind the US-headquartered global angel network starting operations here, says quite candidly that “we came much further than we feared.” The Chennai chapter of Keiretsu invested in 11 ventures – six of them foreign and five domestic – for a total of $972,000. It has on board over 25 members and gets a new member or two every month. He admits that the investment could have been more, but then he is happy that the Chennai chapter has committed investors who are now getting “more excited and drawing deeper into their pockets.” The more recent deals are bigger in size than the earlier ones, he adds.

In the first few months of launching the forum in Chennai, there were no investments by the members although at the monthly forum meetings, five to seven proposals would be put up before them. The members would attend the meetings, listen to the proposals but there would be no follow-up. Srikanth explains the reason: almost all the Keiretsu Forum members in Chennai were first time angel investors and almost all of them came from a non-tech background.

The members belonged to two categories. There were those like S Gopal, Biji Kurien and Chand Das who had retired from senior executive positions in large companies and there were others like C Sivakumar of Prabha Engineers and Manish Marlecha of Marlecha Interiors, all entrepreneurs themselves, who were getting into investing in start-ups.

Learning period

In the first six months, the members were trying to figure out what angel investing was all about, how do they evaluate the deal and what were the risks involved. But then they were only following the rule of thumb for angel investing. That is, in the initial period, do not invest; just observe and learn the process.

Srikanth draws an analogy with learning to swim. Initially, you are happy watching others splashing about in the pool. Then you tentatively dip your toes in the water, then gingerly step into the shallow end of the pool and after a few splashes and when you are comfortable, slowly venture into the deeper part. This is also what happened with the Chennai chapter. “Just like swimming, I am going to get into the pool myself, come with me. I will hold your hand. We did that,” he says. In almost all the first few investments, Srikanth or other office-bearers of the forum co-invested. This gave the other members the confidence they needed to invest.
Over the past year, says Srikanth, the members have become adept at doing due diligence – each one looking at one aspect of the whole process. Of the six US deals, nearly all of them had an India angle to it.

According to him, in the first few deals, individual investors were willing to put in about ₹5 lakh each. Now that is changing and there are quite a few members willing to invest up to ₹25 lakh in a venture. There is also cluster investing. That is, if a member wants to put in money in the names of family members, the forum is okay with it. That way the deal sizes also grow.

The investment is through convertible instruments. That is also Keiretsu philosophy, which is that companies in the early stages are hard to value. And, if a valuation is forced, it ends up being unfair to either the entrepreneur or the investor. “We have taken the view that convertibles are the best way to go. Convertibles with or without a coupon, but definitely with a discount on future institutional round of investment,” says Srikanth.

Lessons learnt

What lessons have they learnt in the first year? Our finding is that a good angel investor needs to be diversified, both in terms of the number of investments and in terms of the sector. Keiretsu and other research show that an angel investor should hold 15 companies in each sector and should have a portfolio of investments in at least three sectors, to be assured of a healthy return. This means a minimum of 45 companies in the portfolio.

Would the investors have the time to focus on so many companies? That is where they have to leverage a network like Keiretsu’s, says Srikanth.

As far as the Chennai chapter is concerned, the members have not invested in e-commerce. “We have not done any deals on e-commerce,” says Srikanth. One of the reasons is that all the members are from traditional industries and the other is that e-commerce valuations are way too high right now.