Angel Investing In India: Understanding The Basics

Angel investing in India has become an increasingly popular way to fund startups, with a community of over 26,500 angel investors in the country. Angel investors are typically wealthy individuals who provide financial support to early-stage businesses or startups in exchange for equity or convertible debt. In India, angel investors must meet specific requirements set by the Securities and Exchange Board, including a minimum net worth. Famous angel investors in India include Ratan Tata, Kunal Shah, and Anupam Mittal. Various networks, such as AngelList India, facilitate connections between investors and entrepreneurs, providing market access and infrastructure for investing in top-tier companies. These networks help investors make smarter decisions and provide support to entrepreneurs, making them integral to India's thriving startup ecosystem.

Who are angel investors?

Angel investors are typically wealthy individuals who are willing to invest in startups in exchange for equity in the brand. They are often entrepreneurs themselves or people with extensive experience in the startup world. Angel investors provide the much-needed capital for startups to grow and help them gain access to wider professional networks. They also sometimes act as mentors to the founders.

Angel investors are usually experienced entrepreneurs who have gone through the same challenges as the startups they invest in. They understand the challenges of creating a successful company and are willing to take a risk on new ideas.

Some notable angel investors in India include:

• Kunal Shah (founder of CRED)
• Binny Bansal (co-founder of Flipkart)
• Kunal Bahl (co-founder and CEO of Snapdeal)
• Vijay Shekhar Sharma (founder of Paytm)
• Anupam Mittal (founder of Shaadi.com)
• Ramakant Sharma (co-founder of Livspace)
• Rajan Anandan (Managing Director at Sequoia Capital)
• Sujeet Kumar (co-founder of Udaan)
• Sunil Kalra (member of the Indian Angel Network)

How to become an angel investor in India

Angel investors are individuals or companies that provide funding to startup businesses in exchange for equity or a portion of revenue. They are often experienced in startups and can help them stay afloat, grow, and make business decisions.

If you want to become an angel investor in India, here are some steps to guide you through the process:

Understand how angel investing works

Firstly, it is important to understand the role of an angel investor. Angel investors choose which startups to fund through research and evaluation of the company's mission, products, finances, and potential profitability. They also support and mentor startups by helping them make business decisions and providing networking connections. As an angel investor, you will also need to understand how and when to collect your returns, which may include equity, revenue, and liquidity events such as acquisitions or initial public stock offerings.

Understand the risks involved

Angel investing carries a higher level of risk compared to other types of investments. This is because startups often lack extensive financial records or a proven track record of success, making it challenging to predict their likelihood of success. Therefore, it is crucial to understand and analyse these risks before making any investment decisions.

Utilise your resources

There are various resources available to help you make informed decisions as an angel investor. These include websites, videos, articles, books, blogs, workshops, and events dedicated to angel investing. Additionally, networking with experienced angel investors can provide valuable advice and connections.

Evaluate potential investments

Angel investments often involve high risks, so investors typically expect high returns. Common industries that attract angel investors due to their potential for high returns include consumer products and services, mobile telecommunications, and electronics. When evaluating potential investments, consider the company's traction, team experience and success, and the marketability of their products.

Join a group or platform

Joining an angel investing group or platform can help you navigate the process and find suitable startups for investment. These groups can provide guidance, connections, and expertise, reducing some of the risk associated with angel investing. Examples of angel investing groups and platforms in India include AngelList India, Mumbai Angels, and Let's Venture.

Develop an investment strategy

Consider your reasons for becoming an angel investor and what you hope to achieve. Define your investment goals, including the number of investments you want to make, the types of investments that interest you, the industries and locations you prefer, and the amount of net worth you are willing to risk. Decide if you are solely focused on financial returns or if you also want to build a legacy by passing on your knowledge and experience.

Determine your investor type

There are several types of angel investors, including partner investors, socially responsible investors, barter investors, and value-oriented investors. Partner investors work closely with the startup and only partner with one company at a time. Socially responsible investors support startups addressing social needs, while barter investors offer services or goods instead of monetary funds. Value-oriented investors share their extensive business experience to help startups succeed.

Choose a valuation method

The benchmark method and the Berkus method are the two main valuation methods in angel investing. The benchmark method involves comparing the startup to similar companies in the same location or industry and assessing their pre-revenue value. The Berkus method uses value drivers, such as the financial health of the business idea, the quality of the prototype, the effectiveness of the management team, strategic market relationships, and existing product sales.

Make your first investment

Once you have gained knowledge about angel investing, identified a suitable startup, and developed a strategy, you can make your first investment. Track your investment regularly to assess its success and reflect on how you can improve your investment decisions in the future.

Angel investor networks in India

Angel investors are wealthy individuals who provide capital for early-stage startups in exchange for convertible debt or ownership equity. They are called angel investors because they invest in risky and young startups, helping them grow their business ventures when other sources of funding are not accessible. Angel investors often provide mentorship and guidance to founders, in addition to funding.

There are around 30 active angel networks in India, according to DataLabs By Inc42. Some of the most prominent angel investor networks in the country include:

Indian Angel Network (IAN)

IAN is one of the leading angel investor networks in India. Founded in 2006, it has over 450 investors from around 11 countries. IAN aims to invest up to $1 million, with an average ticket size of $400,000 to $600,000, and exits in a three-to-five-year period. In addition to funding, IAN provides mentoring, vast networks, and strategic inputs to startups.

AngelList India

AngelList is a deal syndication platform for accredited angel investors to invest in Indian startups. Headquartered in Silicon Valley, AngelList entered the Indian market in 2018 by launching its Syndicates platform. This platform allows angel investors to fund high-growth startups alongside other venture capitalists and angel investors. AngelList India has made 39 investments to date, including in Almo Wear, Hiver, Nap Chief, and Pingo Learn.

Mumbai Angels Network

Mumbai Angels is a leading angel investing platform for early-stage venture investing. The network has one of the most robust portfolios in the country, with over 200 companies, 100 exits, and next-round investments. Mumbai Angels has made 185 investments to date, with an average ticket size of $70,000 to $272,000. The platform has over 700 investors spread across 60 global cities.

The Chennai Angels (TCA)

TCA, formerly known as the Chennai Entrepreneurship Trust Fund, was established in 2007 to foster entrepreneurship and mentor new generations of entrepreneurs. TCA has made 64 investments to date, with an average funding range of Rs. 50 Lakh to Rs 3 Crore. TCA may syndicate the investment with other investor groups for larger deals.

Venture Catalysts

Venture Catalysts is an integrated incubator that offers funding, mentorship, and networking opportunities to startups. It provides investments of $500,000 to $2 million per startup, with incubation support for 18-24 months. Venture Catalysts is one of the largest early-stage players in India, with 4,500+ angel investors across 36 cities in six countries. It has made 253 investments to date.

Chandigarh Angels Network (CAN)

CAN is a community of entrepreneurs turned angel investors, focusing on helping startups at the seed stage. Founded in 2015, it has 37 angel investors who have mentored over 250 startups and funded eight startups so far. CAN investors typically invest between $10,000 and $1 million, depending on the startup stage.

Lead Angels Network

Lead Angels is an alumni-focused angel network facilitating investments of up to 300 lakhs in early-stage companies. Founded in 2014, it has chapters in Mumbai, New Delhi, Ahmedabad, Bangalore, and Hyderabad. Lead Angels has made 49 investments to date, and it assists startups in key areas such as fundraising, business connections, and talent search.

Hyderabad Angels

Hyderabad Angels is a group of angel investors based in Hyderabad, investing in early-stage, primarily technology companies. The network has made 37 investments to date, with an average ticket size of up to $1 million. Hyderabad Angels collaborates with other angel networks, incubators, and institutes across the country to discuss, ideate, co-invest, and share knowledge.

Calcutta Angels Network (CAN)

CAN, founded in 2013, is the first angel investment network in eastern India. With around 75 members, it has invested in 11 startups across India. In 2018, Calcutta Angels Network announced a partnership with Mumbai Angels, where they work together as a single team.

Ah! Ventures

Ah! Ventures is India's largest curated and sector-agnostic fundraising platform for early-stage startups. It has a strong network of 3,000+ investors, including 2,000+ angel investors and 1,000+ institutional investors. ah! Ventures has made 85 investments to date, with a minimum investment of ₹5 Lakh or $7,500 per investor.

The risks of angel investing

Angel investing is a risky business, and investors need to be aware of the challenges and pitfalls. Here are some of the key risks associated with angel investing, particularly in the context of India's burgeoning start-up ecosystem:

Market Risk and Competition

Angel investors need to be cautious about the market readiness of the start-up they are investing in. It is crucial to assess whether the target audience is ready to adopt the product or service. Additionally, investors should be mindful of the competition in the market. Conducting thorough due diligence is essential to understanding the landscape and avoiding investing in a start-up with a weak value proposition or one that is already saturated with competitors.

Team Risk

The success of a start-up heavily relies on its team, and investors should carefully evaluate the founders and key personnel. Red flags include integrity issues, such as dishonesty or misleading behaviour. Investors should also assess the intellectual capacity and emotional intelligence of the founders, including their communication skills, leadership potential, and tenacity. Skill deficits, especially in sales, marketing, and product management, can hinder the start-up's growth and should be addressed.

Regulatory Risk

Regulatory compliance is a significant concern for angel investors. If the start-up's business plan is questionable from a regulatory perspective or requires approvals from authorities, it poses a considerable risk. Additionally, if the business model is deemed dangerous, unethical, or misleading, investors should be cautious.

Financing Risk

Angel investors often face the risk of adverse selection of deals. Established investors, such as venture capitalists (VCs), reject a significant percentage of companies they evaluate. Angel investors might inadvertently invest in deals that more sophisticated investors have passed on. Therefore, it is crucial to understand why other investors have rejected the deal and assess the potential risks associated with it.

Lack of Control and Reporting

Angel investors, especially those with minor stakes, may have limited control over the start-up's decisions. They might not be able to exert influence unless they have a pre-existing relationship with the founders. Additionally, small investors often face a lack of transparency and reporting from the start-up, making it challenging to obtain information about their investment's progress.

Dilution and Liquidity Risk

Angel investors are typically on the lowest rung of the company's cap table, and their ownership percentage can shrink with subsequent funding rounds, especially if they don't invest proportionally. This dilution can impact their potential returns. Moreover, angel investments often lack liquidity, and it may be challenging to exit the investment or cash out, locking up capital for an extended period.

Evaluating startups for angel investment

Angel investing is a type of funding where wealthy individuals with prior startup experience invest in budding startups in exchange for equity. India is home to a bustling angel investing community of 26,500-plus. Here are some key factors to consider when evaluating startups for angel investment:

Innovation and Problem-Solving:

Look for startups that are innovative and focused on solving real-world problems. These startups should leverage technology to target large markets and have a strong execution strategy.

Risk and Return:

Angel investing inherently carries a higher risk, but it should be mitigated by a well-thought-out strategy. Assess the startup's ability to execute their plan and manage risks effectively.

Mentorship and Support:

As an angel investor, you can provide more than just financial investment. Consider startups that would benefit from your strategic guidance, mentorship, and network connections.

Team and Expertise:

Evaluate the startup team's expertise and track record. Look for passionate and dedicated founders who are focused on execution and excellence. Assess their ability to build a strong team and scale the business effectively.

Market Potential and Traction:

Analyze the target market for the startup's products or services. Evaluate the market size, competition, and customer demand. Consider startups with a unique value proposition that addresses a clear need in the market.

Financial Projections and Milestones:

Review the startup's financial projections, revenue models, and milestones. Assess their funding requirements and how your investment can help them achieve their goals.

Due Diligence and Compliance:

Conduct thorough due diligence on the startup, including legal and financial compliance. Ensure all necessary documentation, such as entity formation, KYC, and tax requirements, are in order.

Exit Strategy:

Angel investors typically aim for a 3-5 year exit strategy. Understand the startup's plan for achieving this, whether through a strategic sale, merger, or IPO.

Network and Syndication:

Consider joining or collaborating with business angel networks. These networks can provide valuable insights and deal flow, helping you invest smarter and mitigate risks.

Passion and Alignment:

Finally, invest in startups that excite you and align with your interests and values. As an angel investor, you will play a crucial role in the startup's journey, so ensure it is a mutually beneficial partnership.

Remember, angel investing is a collaborative process, and a strong relationship between the investor and the startup team is essential for long-term success.

Frequently asked questions