Angel Investing 101: The Indian Story

By Sushanto Mitra, Founder, Lead Angels Network

Sushanto Mitra, Founder, Lead Angels Network

Providing a platform for angel investing and supporting to early stage companies, Lead Angels operates mainly in Mumbai, New Delhi, Ahmadabad, Hyderabad and Bangalore.  Founded by IITans, the entity’s members consist of top notch entrepreneurs, successful angel investors and consultants who have been advisors to high growth companies.

That India is a land of wealth and opportunities is now a fact few will dispute. Yet India continues to be a country where lack of money keeps many interesting business ideas to flounder. In the USA, there are over 900 angel networks and almost a million people who invest in early stage companies. Even in smaller countries like Finland, Israel and Estonia whose population is fraction of our metros, the number of angel investors are almost equal to their estimated number of 2000 angels in India.

Angel investing is a phenomenon which started off in Silicon Valley in the sixties where entrepreneurs of technology companies started invested in upcoming startups as well as providing them mentoring support. Companies like Google, Yahoo and Uber are among many who got funded by angels and have become icons of their times. In essence, angels leverage their unique expertise to evaluate, value and provide post funding support to their investments. Angels make money when the companies they invest in are acquired or subsequent investors wish to buy them out. Studies have shown that over the long run returns from such investments are similar to that of other alternative funds such as venture funds and private equity funds. Given the high mortality rates of startups, risks of angel investing are high but with a portfolio approach and through business evaluation risks can be managed. At the same time, most investors in startups make sure that such investment form only a small part of their overall financial assets with a larger share of other asset classes such as debt, listed equity and real estate among others.

Apart from pure returns, angels also look at angel investing as a means of educating themselves of the new business practices and also giving back to society by helping entrepreneurs who are creating new jobs and contributing to the economic growth of a country.

As the individual angels noticed that it was a huge task of looking for startups, evaluating them and then mentoring them, groups of angels got together to form angel networks to co-ordinate their activities and also to delegate some of the administrative functions to the secretariat. Slowly but steadily, individual angels have now given way to majority transactions being done by networks. Of course, there are individuals who continue to invest on their own but their numbers are not growing as benefits of an angel network far outweigh the lone angels.

In India, angel investing took a start in the early years of the 21st century and are growing rapidly across metros such as Bangalore, Delhi and Mumbai. Hyderabad and Ahmedabad are also fast coming up as centers of entrepreneurship and angel investing. There are essentially two types of angel networks in India. There are the national networks and others that are local to a city or region. Depending upon their interests to invest locally or nationally, individuals join up such networks. The advantage of local networks is that local opportunities are better captured by them. On the other hand, national networks with their larger size and usually a larger secretarial team are more connected to the funds and other ecosystem players. Both types of networks charge annual fees of around Rs. 60,000 to 1, 00,000.

In a typical angel network, two to three companies present every month at the local chapter. These companies are shortlisted by a group of members often called the investment committee. If there is sufficient interest in the company among members, some of them especially those with expertise in that area, study the business further and negotiate the terms of the investment. In this way the evaluation is crowd sourced to experts in the group reducing the risk to other participants. In all angel networks the decision to invest and the quantum remains solely with the individual. This is unlike funds where the decision is made by management staff. These investments typically range as a group from Rs. 50 lakhs to even Rs. 6 crores. Individual investments vary from Rs. 3 lakhs to Rs. 10 lakhs. Post the investment commitments; there is a financial and legal due-diligence of the company. This is essentially to analyze and validate the company’s business assumptions and also to check if its operations till date are within the ambit of law.

Apart from angel networks, there are electronic platforms that have also come up recently that provide an opportunity for investment into startups. These are more like marketplaces for startups to raise money and while providing an opportunity to a larger set of people, lack the touch and feel of evaluating deals present in angel networks.

Going forward, as offline angel networks bring online elements such as video recording of pitches and live telephonic conversations with entrepreneurs and investors, the differences between these two modes will get blurred.  The government is also considering opening equity crowd-funding and the Security Exchange Board of India (SEBI)is expected to come up with regulations similar to the ones in the western world. If and when that happens, the public at large will be able to make investments in early stage companies. Until then, however, the angel networks will continue to remain a key mode of investing into startups in India. 

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