Published on June 03, 2024
Article by Prarthana Kanojia Reviewed by Sachin Kolekar
Have you ever dreamt of being part of the next big thing?
The startup world is an ecosystem for innovation, with the potential to revolutionize industries and change the way we live. But these young companies with new business models often need funding in their early stages – that’s where angel investors come in. Imagine turning a ₹80 lakh bet into a cool ₹140 crore! That’s the kind of magic Sanjay Mehta has achieved by investing in OYO, the hospitality giant – who revolutionized budget accommodations worldwide, his partial exit from this venture fetched him an astonishing 280X return. Looking beyond Mehta, we have Aman Gupta, a judge on the popular reality show Shark Tank India. In just two short years, his ₹20 lakh investment in the ice popsicle brand “Skippi” turned into a whopping ₹6 crore, translating to a 30X return! These stories exemplify the power of spotting a hidden gem and the potential of wins in the startup world.
The success stories extend even further. Kunal Bahl‘s ₹38 lakh investment over 6 years in the Company Mama Earth, resulted in a partial exit during its IPO, generating a jaw-dropping 97x return and a cool ₹37 crore in earnings. Similarly, Sanjeev Bhikchandani of naukri.com early investment in Zomato through his company Info Edge, saw their initial investment of ₹4.7 crore skyrocket to a staggering ₹23,000 crore – a mind-blowing 4839X return! Even today, Info Edge holds a significant stake in Zomato, showcasing the potential for long-term value creation through angel investing, this is more than profit piled together of Info Edge Ltd. together since inception. The stories of Nikunj Jain and Ankit Nagori paint a similar picture. Jain’s ₹1.5 crore investment in Rapido is now valued at a phenomenal ₹290 crore, a 193x return, while Nagori’s ₹4.8 crore bet in Groww Company has grown to a staggering ₹180 crore, a remarkable 38x increase.
These are just a few examples of the immense potential that angel investing holds. However, it’s crucial to remember that angel investing has risks. Many startups fail, and investors can lose their entire investment. But for those with the right experience, correct approach and a keen eye for talent, angel investing can be a thrilling journey, offering the chance to be a part of the next big thing and reap the rewards of fostering innovation.
Who is an Angel Investor?
Angel investors are high network individuals (HNI) who invest in the next big thing and next idea which looks promising to disrupt the market. They offer early-stage pre-seed/ seed capital to startups in return for ownership stakes. Angel investors invest in small startups therefore the odds of absolute risk and rewards are equally high. These are private investments either there is a possibility of losing out entire capital or the triumph of making multi-bagger returns.
However, if you invest in an Alternative Investment Fund (AIF)’s Angel Fund that is institutionalized and which comes under Venture Capital act – regulated by SEBI, the investment risk is lower since the funds are not invested in a single company but in a Portfolio of 15 to 20 odd high-growth potential Startups within a longer time frame, therefore even if a minority of investment bet goes bad the other majority companies generate a – substantial returns to compensate for the loss, overall making a multi-fold return for their investments.
To understand more about AIF and get your journey started in Angel Fund AIF investments connect with investbazaar.com, we evaluate the client’s risk appetite and match caters to you with investment that best suits the investment and risk appetite.
Angel investors typically invest in the early stage of the business idea and mostly between the Early to Pre-Series round, when the business idea has been established but has not gained momentum due to lack of capital or other resources. Their primary motivation lies in the potential for substantial multi-bagger returns if the company achieves success. Beyond funding, angel investors often act as mentors, offering valuable guidance to the founders navigating the challenges of a young company.
Key characteristics of angel investment:
- Stage: Investment in Early-stage start-ups with high growth potential.
- Type: Ownership stake in the company (or convertible debt, which can be converted into equity later).
- Investor goals: High returns on Funding provided and support through mentorship and connections to entrepreneurial ventures.
- Investors: Affluent individuals with sector experience and industry networks. Some known Angel Investors examples are Anupam Mittal, Kunal Shah, Ramakant Sharma, Rajan Anandan, and Vijay Sekhar Sharma.
Importance of Angel Investors in the Start-up Ecosystem
Here’s how angel investors play a pivotal role:
- Bridging the Funding Gap: Since the startups are typically new and with a unique business model or idea, unlike traditional business. These startups are entirely in a completely innovative model which takes an uncharted territory which is hard to digest for the traditional bank which mostly lends with collateralized based loans or with established track record of 3 to 5 years in business. These loans are best suited for traditional business. These young companies lack the extensive financial history and established assets that banks typically require for loan approval, creating a significant funding gap. That’s where angel investors come in like agents of god – True Angel! They provide the early funding, like seed money, in the prototype development stage, when the firm develops a minimum viable product (MVP) and puts it up for an adoption test in the market, that startups need to get things going.
- Mentorship and Guidance: Startup journey is altogether walking in an uncertain & unforeseeable path of creating value for the customers. Therefore in this uncertain journey of the start the business as well as the founder, both need guidance with capital to deploy and do the course correction as per the guidance of experienced angel investors. Many Angel investors are experienced business veterans; they don’t just hand over funds, they share their wisdom and experience. These small but important assistance act as a goldmine for startup business and founders who are driving the business! Need help with your marketing plan? Stuck on a growth strategy or vendor selection? An angel investor might be just the mentor they need to navigate the crazy world of running a young company.
- Network and Connections: Startup businesses are new in the industry with unestablished product reviews and no client testimonials therefore a good connection with an Angel Investor breaks the hierarchical door and gives the startup’s founder an express entry to the decision-maker access which increases the possibility of startup to pitching to the right person this acts as a boon to the startup’s founder to convey the product /service idea to the decision maker. Angel investors often boast extensive networks within their industries. These connections can be instrumental for startups seeking to forge partnerships with potential customers, collaborators, or even future investors like venture capitalists. This access to a curated network can significantly accelerate a young company’s growth trajectory.
- Boosting Innovation: Angel investors play a critical role as catalysts for innovation within the startup ecosystem. Their appetite for backing nascent ventures with disruptive technologies fosters the exploration of novel ideas and the potential for groundbreaking solutions. This willingness to take on risks with early-stage companies fuels the engine of innovation.
How to Become an Angel Investor in India?
Angel Investors can follow the Two Approaches mentioned below to Invest in Ventures and become a part of the Start-up Ecosystem :
- First Approach – via AIF Category 1-Angel funds :
Under the guidance and regulation of SEBI under Chapter III-A of the AIF Regulations, Angel funds are a specialised type of “Venture Capital Fund” within Category I of Alternative Investment Funds (AIFs) in India. Capital is collected from Angel investors and is invested in high-growth potential startups that have crossed the proof of concept stage and have made their mark already in the market.
- Second Approach – “Direct Investing” :
In direct investment, as the name suggests Angel investors identify companies with growth potential and invest directly into the venture based on their understanding of research, and risk.
Let’s understand the First Approach – AIF Category 1-Angel funds in detail :
As mentioned, and regulated under Chapter III-A of the AIF Regulations, angel funds are a specialised type of venture capital fund within Category I Alternative Investment Funds (AIFs) in India. They gather capital from angel investors and create a pool of investment and invest in multiple high-growth startups.
Today India is one of the fastest-growing economies and has remained resilient throughout the COVID-19 pandemic, achieving a commendable GDP growth of 8.4% during the October-December quarter of the 2023-2024 financial year. Despite the global economic shockwaves caused by the pandemic, the IMF’s conservative estimates indicate that India will emerge as the world’s third-largest economy by 2027, surpassing Japan and Germany, with a GDP exceeding US$5 trillion.
The Indian start-up ecosystem is brimming with potential as the Indian economy has entered the Growth stage, and Angel funds are playing a critical role in fueling its growth. If you’re a high-net-worth individual or an NRI interested in backing innovative ventures, here’s a guide to navigating your journey as an angel investor in India.
- Eligibility: Angel investors are regulated by the Securities and Exchange Board of India (SEBI). To qualify as an angel investor, you must meet one of the following criteria:
Individual Investor: An individual should possess net tangible assets of at least ₹2 crores (excluding your primary residence). It would be an added advantage but not necessary if the investor has some prior experience in early-stage funding or is a serial entrepreneur himself. Angel funds have the option to accept funding from angel investors, which starts with a minimum ticket size of ₹25 lakh.
- Corporate Body: Corporate bodies with a net worth of at least ₹10 crore can invest in AIF.
- Registered Investment Vehicle: To invest in startups via Angel funds, you’ll need to participate through a registered investment vehicle. This could be either an Alternative Investment Fund (AIF) following the SEBI AIF Regulations from 2012 or a Venture Capital Fund (VCF) registered under the SEBI (VCF) Regulations established in 1996.
Let’s understand the Second Approach – “Direct Investing” in detail :
In direct investment, as the name suggests Angel investors identify companies with growth potential and invest directly into the venture based on their understanding of research, and risk.
1. Build Your Investment Profile:
Define Your Interests: What gets you going? Before diving in, consider industries or areas you’re passionate about or have experience in. This focus will make it easier to understand and evaluate potential startups.
Risk Tolerance: Angel investing carries inherent risks. Investors should be prepared for the potential for partial or complete loss of capital. It’s crucial to only allocate funds that can be comfortably lost without impacting financial well-being.
Investment Horizon: Great things take time, and startups are no exception. Be prepared for a long-term commitment. It may take several years before you see any returns on your investment.
2. Developing Your Investment Skills:
Due Diligence: Before investing conduct in-depth research on potential startups, meticulously analyzing their business plans, financial health, team composition, and the viability of the market opportunity they are pursuing.
Valuation Techniques: Develop a strong understanding of valuation techniques used for early-stage companies to make informed investment decisions regarding stake allocation.
Deal Negotiation: Master the negotiation of key deal terms, including investment amount, ownership percentage, and the long-term exit strategy for both the investor and the startup.
3. Finding Promising Start-ups:
Angel Investor Networks: These platforms connect accredited investors with exciting startups seeking funding, providing access to a curated pipeline of potential investment opportunities.
Startup Incubators/Accelerators: Participate in programs and events organized by leading incubators and accelerators. These organizations provide a valuable platform to discover promising early-stage ventures mentored by experienced industry professionals. Through these programs, you can gain insights into the latest innovations and network with talented founders.
Industry Events: Attend industry conferences, meetups, and trade shows. These events offer exceptional opportunities to network with entrepreneurs at the forefront of their respective fields. By engaging with these individuals, you can gain valuable insights into emerging trends and identify potential funding opportunities that align with your investment interests.
4. Additional Considerations:
Legal and Tax Implications: Secure professional guidance on the legal and tax implications of angel investing. This proactive step will ensure you are fully informed about potential risks, structuring options, and tax consequences associated with your investments.
What is the difference between Angel investors and Angel Investment funds?
|
ASPECTS |
ANGEL INVESTORS |
ANGEL INVESTMENT FUNDS |
|
Investor Profile |
Angel investors are individual investors who Provide personal capital to invest in Startup |
Angel investment funds are institutionalized Investment funds under AIF CAT-I regulated by SEBI, which are collective investment vehicles formed by pooling money from multiple investors like high-net-worth individuals (HNIs), and NRIs. |
|
Source of funds |
Provide personal direct investments in the form of seed funding. |
Angel investment funds operate as pooled investment vehicles. Angel investment funds are more or less similar to mutual funds, but with a bigger ticket size of ₹ 25 Lacs |
|
Risk and Diversification |
Angel investors bear full investment risk and have to conduct due diligence personally, due to their investment in specific startups it may increase individual risk. |
AIF offers diversification benefits by spreading capital across multiple startups. Fund managers conduct due diligence, select investments, and manage portfolios, thereby reducing the risk of total capital loss. By pooling investments and allocating them to various startups, these funds help mitigate risk effectively. |
|
Expertise and Resources |
Individual angels may offer expertise, industry knowledge, and networks to startups, but often lack the resources/time and access to deals such as JV’s, M&A’s, etc. which larger funds have. |
Angel investment funds leverage professional teams proficient in venture capital, startup evaluation, and portfolio management, granting them access to extensive networks to grant enhanced support to their portfolio startups. |
|
Exit Strategy and Liquidity |
Individual angels negotiate unique terms and exit strategies directly with startups, potentially opting for exits via acquisitions, IPOs, or secondary market sales, though these liquidity events often entail uncertainty and can span over several years, due to illiquid private investment. |
All the funds have a predetermined exit strategy and an investment horizon. Portfolios are actively balanced to maximise returns. |
Conclusion:
It can be easily concluded that direct investing in a business venture is not a simple job as it includes scouting the right startup to invest in, conducting due diligence, negotiating the right valuation for investing, working out the exit strategies, drawing out the necessary paperwork, and the legal fees and other expenses and if the deal doesn’t go through out of numerous reasons, you need to do the entire exercise again and again till you clinch a deal.
Investing via Angel funds relatively takes all the hassle out of investing by virtue of a professional management team dedicated to Angel investments taking care of all the required due diligence and paperwork requirements all while minimizing the risk of loss of capital by diversifying the investment in multiple business ventures.
investbazaar.com entire team is instrumental in guiding you the pathway to ease your investing journey of becoming an Angel investor connect with us at [email protected].
FAQs
Q1. What is angel investing?
Angel investing is when an individual invests their own money in startup venture in exchange for ownership equity or convertible debt. Angel investors typically invest in early-stage companies that have a high potential for growth but are too risky for traditional banks or lenders.
Q2. What are the benefits of angel investing?
The benefits of angel investing include the potential for super high returns on investment, the chance to be involved in innovative new companies, and the satisfaction of helping entrepreneurs succeed.
Q3. What are the risks of angel investing?
Angel investing is a high-risk investment. There is a significant chance that you could lose all of your invested capital. Startups often fail, and even if your invested startup is mega successful, it may take many years before you see a return on your investment due to the nature of the investment horizon and illiquidity of investment.
Q4. Who can be an angel investor in India?
To be an angel investor in India, you must meet certain eligibility criteria set by SEBI. These criteria include having a minimum net tangible asset value or being a registered investment vehicle.
Q5. How can I invest in startups as an angel investor?
There are two main ways to invest in startups as an angel investor in India:
- Direct Investing: You can identify promising startups yourself and invest in them directly.
- Investing Through Angel Funds: You can invest in startups through Angel funds, which are pooled investment vehicles that invest in a number of different startups. These Angel Funds are an institutional body under Alternative Investment Fund (AIF CAT-I) under supervision of SEBI.
Q6. What are the advantages and disadvantages of direct investing vs. investing through angel funds?
Direct Investing
- Advantages: You have more control over your investment decisions, you are free to take your call.
- Disadvantages: It can be time-consuming and difficult to find promising startups. You will also need to conduct your own due diligence on any startups you are considering investing in which need your time & efforts.
Investing Through Angel Funds
- Advantages: Angel funds take care of sourcing great startups with their network and do all the legal checks before investing, the Angel Funds are an institutional body under Alternative Investment Fund (AIF CAT-I) under supervision of SEBI. The Angel Funds also provide you with the benefit of investment diversification and professional management.
- Disadvantages: You will have less control over your investment decisions and you have pay higher fees a management fee of 2 to 2.5% annually (similar to expense ratio of mutual fund) and 20% of performance (famously known as 2:20 venture capital industry) above the hurdle rate to management all the investee companies and manage their monthly-quarterly checks & balances to monitor their growth.
Q7. What are the legal considerations for angel investors in India?
Angel investors in India must comply with SEBI regulations and ensure they have properly structured investment agreements in place. It is also important to understand the intellectual property (IP) rights of the startups you invest in.
Q8. What are the tax implications for angel investors in India?
Angel investors in India may be subject to angel tax, capital gains tax, and dividend distribution tax. It is important to consult with a tax advisor to understand how these taxes will apply to your specific situation case to case basis.
Q9. What are some successful angel investors in India?
Some successful angel investors in India include Kunal Shah, Anupam Mittal, and Ramakant Sharma. These investors have made a number of successful investments in Indian startups. They are seasoned entrepreneurs and experienced investors.
Q10. Is angel investing right for me?
Angel investing is a high-risk investment that is not suitable for everyone. Before you decide to become an angel investor, you should carefully consider your risk tolerance and investment goals. You can definitely take free risk profiling and talk to the financial advisor or expert.
Disclaimer: The information provided in this article is for informational purposes only and should not be considered as investment advice. Please consult with a professional financial advisor before making any investment decisions.
