Funding new ideas

Somewhere in the preface the authors remark that "time is now compressed in ways that Einstein would have scarcely imagined". When the US edition hit the stands in early 2001, this was just a throwaway observation.

By the time this Indian edition made it to print in mid-2004, it was the leitmotif. In those three brief years, the angel investing (or venture capital, as it's commonly called) industry had gone through a cycle of churn that the authors themselves could scarcely have imagined.

Hindsight can sometimes be a useful analytical tool "" but it is also an involuntary reflex. It is impossible to read this book strictly in the context in which it was written. What has happened since has coloured our perception and understanding too dramatically.

The original context was fairly simple. Angel investing "" the art of investing in start-ups "" was a growth industry during the dotcom era. (The etymology derives from the entertainment industry where the financial backers of stage productions are known as angels.)

By 1999-2000, when most of the research for this book was done, VC funding had hit a crescendo. There were VCs wandering around the world with buckets full of cash hunting for new, sexy business plans.

From Cisco, Netscape and Yahoo! to AOL, Amazon and e-Bay, hundreds of businesses had gone from start-up to stock-exchange listing, with payoffs ranging at 1,000 per cent or more for the "angels".

Most high net-worth individual wanted a slice of this pie and by 1999, surveys suggested that one in three VCs was happy to fund on the basis of a single-page executive summary without asking for details. The authors derived a road-map for the process of angel investing, listing a multitude of traps and pitfalls for the unwary.

In 2001, within months of publication, the bubble burst and the feeding trough turned into the Barmecide's dinner-table. By 2002, the industry was moribund and it is only now rising from the ashes. But the authors' advice about managing the inherent risks in VC investing is as valid now as it was in 2001.

According to the authors, the book is aimed at two primary audiences; the novitiate angel entering the industry at the height of the boom and the academic trying to make sense of it.

A select few would have been willing to listen in 2001; a time when caution was drowned by greed. The grizzled survivors who remain in the VC business circa 2004 have learnt more about risk-management than any book could teach.

But that segment of the primary audience has perhaps been replaced by a different one "" this book seems pretty useful for the entrepreneur with ideas who is seeking funds in a less-than-hospitable environment. And, of course, the relevance to academics remains.

More than ever, we need to understand why the manic-depressive dotcom-dotbust cycle occurred and to incorporate those understandings into future business models.

There will always be need for angel-investors. There are a multitude of ideas that are simply too risky to be funded by banks.

In an age where the global economy is driven by technological change, those ideas will be conceptualised and implemented by young people with little access to either formal lines of credit or indeed, little idea how the "real world" works. Most start-ups fail for some reason or the other but enough come through for smart VCs to continue making big returns.

Successful angels add much more than capital to a start-up "" they bring value in many tangible and intangible forms, providing the framework wherein an interesting idea is transformed into a viable business.

From initial due diligence to legal expertise, financial valuation and jugglery, the VC may provide a large portfolio of business skills.

The process requires far more in the way of involvement than crunching numbers and trading stocks. There are often tense set of interactive transactions where the VC and the entrepreneur bat micro-level decisions back and forth.

As the CEO of a (successful) Internet company once explained, "We had a Vice-President in charge of Vinod Khosla" referring to the legendary VC's habit of demanding detailed daily reports on "his" start-ups. On one occasion, Khosla complained that the company used expensive pens!

The book packs plenty of research and insight into its 350 pages. It walks through every stage in this game, using case-studies and citing statistics when required to make its points. It is written lucidly, deftly walking the line between management gobbledygook and self-help oversimplification.

It is very US-centric but that's a function of the VC game. Most VC money originates in the US and the industry's parameters are geared to Nasdaq IPOs.

It also has extremely useful appendices of suggested reading lists and VC directories. If you want to take a flier on a new idea or you've invented a new mousetrap that you're hawking, the guidelines here will be very useful.

THE ANGEL INVESTORS HANDBOOK

Gerald A Benjamin & Joel Margulis Vision Books
Price: Rs 595
Pages: 351