If an individual is an aspiring entrepreneur or a business owner looking to secure capital, the odds are that he/she has come across the term angel investors. However, what are angel investors?
Angel investors are wealthy individuals who financially back start-up ventures or small businesses in return for ownership equity or convertible debt. Usually, these investors are accomplished businesspeople, entrepreneurs, or high-net-worth individuals looking to invest in new and promising opportunities. Angel investors are instrumental in the initial stages of a business since they provide more than just money; they also offer valuable insights, mentorship, and industry connections. This guide provides an in-depth understanding of angel investors, covers what is angel financing and how angel investing works, and also determines the benefits and drawbacks of angel financing.
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Angel Investors Meaning
An angel investor is an affluent individual who provides financial backing to early-stage startups or small companies. They generally invest their funds in return for ownership equity in the business or, more frequently, in convertible debt that can be converted into equity. Angel investors are often described as intermediaries between friends and family and investment capitalists. They are critical to the growth of startups and invest in early-stage companies with little to no demonstrated market history. Angel investors not only invest in the companies they acquire but also help entrepreneurs develop a network of contacts and offer advice and mentoring.
Who Are Angel Investors?
Angel investors can come from diverse backgrounds, but some of the most popular profiles are the following:
1. Successful Entrepreneurs
Entrepreneurs who have succeeded in their business are among the most famous angel investors. They are attracted by the possibility of helping the next generation of entrepreneurs and applying their experience and knowledge for the greater good of young companies.
2. Industry Experts
Other frequent categories of angel investors are people with significant experience in a specific industry or sector. They may want to invest in a company operating in an industry they know well and leverage their network connections and specialised knowledge to help these companies survive and thrive in their market.
3. Affluent Individuals
Angel investors can also be doctors, lawyers, and other high-earning professionals willing to invest their money in a startup and make a considerable profit. This type of angel investor is also interested in diversifying their investment portfolio.
Examples of Angel Investors in India
Now, as you are already aware of the definition of an angel investor, let’s see some examples:
1. Anupam Mittal
Anupam Mittal is the founder of Shaadi.com and People Group. He has backed multiple startups, including Ola, CarTrade, and BlueStone. He has used his extensive experience and network to support startups that have the potential to make it big.
2. Kunal Shah
Kunal Shah is the founder of Freecharge and CRED. He has invested in more than 150 startups across the country, proving his ability to spot and believe in interesting ideas and concepts in multiple sectors.
3. Girish Mathrubootham
Girish Mathrubootham is the CEO of Freshworks, a leading customer engagement software firm. He has also backed several other startups and businesses, with which he shares his deep expertise in building successful tech businesses.
4. Harshil Mathur
Harshil Mathur is the CEO and co-founder of Razorpay. Inspired by his deep-rooted knowledge of the fintech landscape, he has used angel investing to promote startups in the fintech space and other related sectors.
5. Vijay Shekhar Sharma
Vijay Shekhar Sharma is the founder of Paytm, the first and largest digital payments platform. As a result, he has also invested his money in many startups.
6. Sanjeev Aggarwal
Sanjeev Aggarwal is the founder of Urban Ladder, a well-known furniture and home decor brand. Sanjeev has participated in many startups as an angel investor and invested in finTech and consumer-facing startups.
What Does an Angel Investor Look For?
It is difficult to evaluate the parameters that an angel investor looks for. However, broadly, it is the team, the problem statement, and the short-term and the long-term roadmap that matter the most. Some of the questions that angel investors have on top of their mind are:
- Does the founder know their business in-depth? Or are they only making passionate & assumptive statements?
- Is the idea disruptive in nature and solving an existing problem? How is it going to overtake the existing competitor in the market?
- Is there a planned roadmap for the next 6-12 months? If yes, how effective is it?
- Is the problem big enough to solve?
- Will the customers pay to get their solution?
- Will it make a difference to customers, if that solution is removed from their life?
- Is there a measurable set of customers already there?
- Will there be repeat purchases?
As mentioned, these questions are generic in nature. The overall call to invest also varies based on personal relationships, past experiences, and so on.
Types of Angel Investors
There are two main ways to categorise angel investors: one by their investment style and the other by their level of involvement.
1. By Investment Style
- Lead Investors: The first group of angel investors to invest in a company are called lead investors, and they are often the most important ones. Lead investors invest a significant amount and are more actively involved in guiding the startup’s evolution.
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Co-investors: Also referred to as co-lead investors, they invest along with a lead investor and invest much less than lead investors. They increase the total funding and bring diverse perspectives.
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Syndicates: A group of angel investors who combine their money to make a single, more significant joint investment is known as a syndicate. This enables them to participate in more significant offers that individual angels might not be able to.
2. By Involvement Level
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Active Angels: These are always actively looking for potential startups and make frequent investments each year. Such individuals are often involved in mentoring and providing guidance to the companies in which they have invested.
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Sleeper Angels: These are angels who invest less frequently but may have a smaller portfolio of startups in which they have invested.
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Aspirational Angels: These are aspiring angels who are just getting started. They may even be making their first investments.
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Super Angels: These investors have high net worth and often invest larger sums, sometimes matching venture capital levels. In several respects, these individuals may perform as mini venture capital firms, with aspects and teams designed to help their investments.
- Ultra High Net Worth Individuals (UHNWIs) With Investment Advisors: This includes highly wealthy people with high net worth who depend on advisors to invest their capital, which may consist of angel investing.
- Single and Multifamily Offices: These are private wealth management firms that manage investments for wealthy families. They allocate a portion of their client’s assets to angel investing.
How Does Angel Investing Work?
As you already know what is angel investing, let’s dive deep into its working process. Angels invest small amounts compared to venture capitalists, but they can provide valuable mentorship and connections to the company. Although angel investing in India is high risk, successful investments can provide significant returns on investment. Angels also benefit from tax incentives and favourable treatment of capital gains.
What Are the Origins of Angel Investors?
Angel investing is a concept that has existed for years and can be linked to specific periods in history and economic situations. Several landmarks have been recorded in the years that have defined and confirmed how essential angel investors are in the startup environment. The formation of the National Venture Capital Association in the 1970s was a significant landmark, as it institutionalised and encouraged angel investing. Moreover, the establishment of angel investment networks and the involvement of more high-net-worth people in this area as angel investors assisted in the evolution of this type of investment.
Notable examples of successful angel investments in India include Flipkart, Ola Cabs, and Paytm, which received early-stage funding from prominent angel investors like Sachin Bansal, Bhavish Aggarwal, and Vijay Shekhar Sharma.
How to Find Angel Investors in India?
There are several ways to find angel investors in India:
- Personal Connections: One of the best ways to find an angel investor is through personal and professional connections or referrals. Ask any known person to refer or introduce an individual interested in investing in a startup. Sometimes, the best investors in a startup come from personal connections.
- Networking Events: Attend startup events, conferences, and networking meetups taking place in the city or region. These events are often visited by angel investors seeking attractive investment opportunities.
- Angel Investor Networks: India has various angel investor networks, such as the Indian Angel Network, Mumbai Angels, Hyderabad Angels, Chennai Angels, and more. Research these networks to understand their investment criteria and apply to be a part of their portfolio.
- Online Platforms: Online platforms connect startups and investors. In India, some of the most popular ones include LetsVenture, AngelList, and Venture Catalysts. Create a profile and make sure to highlight the startup’s potential to attract the investor community.
- Incubators and Accelerators: Individuals can join startup incubators and accelerators that offer funding, mentorship, and networking opportunities.
- Industry Associations: Find industry-specific associations that suit the startup and have pools of investors interested in the industry. Become a member and participate in their events often.
- Social Media and Online Forums: Use platforms, such as LinkedIn, Twitter, and startup forums interested in the industry by sharing updates about the startup and connecting with potential investors.
- Pitch Competitions: Participate in pitch competitions and startup challenges. Winning these competitions will secure financial support and make a startup more visible to potential backers. These events may showcase the startup’s capabilities and help attract angel investors.
- Financial Advisors and Consultants: Consult financial advisors or consultants with expertise in startup financing. Some advisors may be related to angel investors or can give valuable advice on fundraising tactics.
How to Approach Angel Investors?
Approaching angel investors requires careful planning and execution to make a positive impression and increase the chances of securing funding. Here are some steps to effectively approach angel investors:
- Research: The first step before approaching any angel investor is to research their background, investment preferences, and past investments. Determine the sectors they prefer, their areas of focus, the industries they target, and their investment criteria. It will help in customising the pitch and increase the chances of attracting the attention of investors.
- Warm Introductions: It is advisable to seek mutual connections or trusted advisors who can introduce the entrepreneur to investors. A warm introduction through a trusted person can increase the entrepreneur’s credibility and the likelihood that investors will read the pitch.
- Craft a Compelling Pitch Deck: Develop a visually well-designed pitch deck and ensure to highlight the startup’s unique value proposition, market opportunity, business model, traction, team, and financial projections. Make the presentation short and direct; the description must show what’s unique and special in the startup that makes it a likely investment.
- Show Traction: Investors need to see some traction and validation in the startup; this could include customer testimonials, user metrics, revenue growth partnerships, product/milestones, etc. It may reduce investor perception of risk.
- Be Transparent and Honest: Be honest about the risks a person might face when building a startup. Honesty is an essential element of trust, and as an entrepreneur, establish trust with potential investors. Be transparent about the challenges and risks and clearly articulate how to eliminate them.
- Highlight the Exit Strategy: The investors will want to get insights about how they will get their returns on investment in the future. Explain the exit strategy, whether through acquisition, IPO, or other means, and how investors are assured of getting a good return on their investment.
- Follow-Up: The next step after making the first pitch is to follow up with the investors to give them any information or details they may request. Moreover, express appreciation for their time. Also, periodically update them on the progress and milestones achieved.
- Be Open to Feedback: Finally, be open to getting feedback, even if the investors seem uninterested in investing. They can give valuable advice that an individual can use to improve his/her pitch for the next opportunity.
Eligibility Criteria for Angel Investors
To qualify as an eligible angel investor in India, an individual needs to meet one of these three conditions:
1. Individual Investor
Individuals must have at least ₹2 crore in total assets, excluding the value of their main home.
On top of that, he/she needs to have one of these:
Experience in making early-stage investments.
Experience as a successful entrepreneur who has started multiple businesses.
At least 10 years of senior management experience in a company.
2. Body Corporate (Company)
The company must have a net worth of at least ₹10 crore.
3. Alternative Investment Fund (AIF) or Venture Capital Fund (VCF)
The AIF or VCF must be registered with the Securities and Exchange Board of India (SEBI).
The landscape of angel investors has become increasingly diverse over time. Angel investors now come from diverse backgrounds, including successful entrepreneurs, industry experts, and high-net-worth individuals, contributing to a more vibrant and dynamic start-up ecosystem.
What Are the Sources of Angel Investing?
Usually, angel investors are individuals with enough financial resources who derive their funds from personal savings, success in prior businesses, and active membership in individual angel investor groups. In this regard, angel investing continues to thrive as various funding sources inspire investor interest in entrepreneurial ventures and innovative startups. Thus, this analysis helps entrepreneurs and investors explore potential sources of capital for their investments.
Angel Investment profile
Angel investors exhibit distinctive characteristics and preferences crucial for entrepreneurs and investors to understand. These include risk tolerance, investment horizons, and industry preferences. Additionally, angel investors demonstrate a keen eye for identifying promising opportunities, whether it’s successful entrepreneurs reinvesting in the next generation of startups or high-net-worth individuals seeking to fuel innovation. Their industry preferences span a wide range, from tech and healthcare to consumer goods and fintech, reflecting the breadth of their investment interests.
Advantages and Disadvantages of Angel Investors
Advantages of Angel Investors
One of the biggest advantages of working with an angel investor is that they take higher risks than any other traditional institutions, like banks. There are also a few cases wherein an angel investor does not have to be paid back in case the startup fails and the product or service does not get an adoption. The best part is that, usually, an angel investor is an experienced business person who has many years of experience. They bring a lot of knowledge to the table for a startup, which can boost growth for them.
Disadvantages of Angel Investors
The primary disadvantage of working with angel investors is that they usually purchase a stake in the startup. Because of this, they expect a certain amount of involvement in decision-making and more as the company moves forward. It leads to conflicts, which might affect the entire business at times.
Differences Between Angel Investors and Venture Capitalists
Although angel investors and venture capitalists significantly support startups, they differ in their funding patterns. Angel investors are usually high-net-worth individuals with a personal interest in helping startups and investing their money in early-stage businesses. They also provide mentorship and advice to ensure the success of their investment.
Venture capitalists, on the other hand, are responsible for managing pooled investment funds that invest in already established startups in the growth phase. They evaluate an investment opportunity for its scalability potential and other factors. These institutions invest in big numbers and use a more structured approach.
Conclusion
From less than 50 angel investors a decade ago, the Indian startup ecosystem has now recorded more than 2000+ angel investors. With an idea that can simplify the lives of people, add value, and become a part of the human ecosystem, the opportunities are limitless. Find USP, create an outstanding pitch, and go out to find the angel!
Frequently Asked Questions
1. Is Angel Investing Profitable?
Angel investing can be profitable, but it is also a high-risk investment strategy. Many startups fail, so there is a high likelihood that an angel investor may lose their entire investment. However, successful investments can provide significant returns, sometimes exceeding a 10x return on investment. While returns can take several years and are not guaranteed, some angel investors have earned significant wealth through successful investments. Overall, angel investing can be a profitable investment strategy, but it is important to carefully consider the risks and potential rewards before investing.
2. How does an angel investor get paid?
Angel investors make money through a variety of methods, including equity ownership, convertible debt, or royalties. If the company succeeds, the angel investor can sell their equity stake for a profit or receive dividends. Some angel investors may also negotiate a buyout or acquisition of the company. However, if the company fails, the angel investor may lose their entire investment.
3. What percentage do angel investors take?
The percentage of equity that an angel investor takes in a company can vary widely and is negotiated on a case-by-case basis. Generally, the percentage of equity that an angel investor takes is determined by the amount of money they invest. The more money an investor puts in, the higher the percentage of equity they will typically receive. Angel investors typically aim for a return of at least 10 times their initial investment, so they may negotiate a larger percentage of equity in exchange for their investment.
4. Who needs angel investors?
Startups and early-stage companies usually need the support of angel investors.
5. What is the average investment size of angel investors?
On average, angel investments are typically between ₹3 lakh and ₹20 lakh per investor. However, when pooled collectively as a group, these investments can run into several crores. It’s important to note that these figures can vary widely depending on the specifics of each deal and the investors involved.
6. How involved are angel investors in the management of the startups they invest in?
Angel investors are usually actively involved in the management of the startups they fund. Most angel investors provide mentorships with relevant decisions and strategic connections to the founding team.
7. Are there specific industries or sectors that angel investors prefer to invest in?
Angel investors in India invest in industries where they have developed personal expertise, such as technology, healthcare, consumer products and services, and financials.
8. What are some alternative sources of funding for startups besides angel investors?
Startups in India can attract funding from venture capital funds, crowdfunding platforms, small business loans, incubators and accelerators, and even friends and family. Each source has its advantages and disadvantages in terms of investment size, involvement, and terms.
9. Are there any tax implications for startups receiving funding from angel investors?
Yes, there can be tax implications. The startup may need to issue equity or convertible notes to the angel investor, which can affect the company’s ownership structure and future financing options. There are also potential angel tax credits and deductions available for both the startup and the angel investor, depending on local regulations in India.
