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They say angel investors are sent from the heavens, thus the name. These are the people who bet on entrepreneurs before everyone else does. Today, the ecosystem of angel investment is more mature than in the past. It is gaining traction like never before. The likes of Rajan Anandan, Anupam Mittal and T.V. Mohandas Pai were the pioneers in the space. Today, we have many successful entrepreneurs who branch out into this asset class after their businesses reach a certain scale. Some examples here would be Girish Mathrubootham, Rohit Bansal, Nitish Mittersain, Sujeet Kumar, Sandeep Nailwal and many others.
With the returns being better than many other investment avenues, we are also seeing CXOs and senior leaders betting on budding entrepreneurs right at the start of their journey, albeit sometimes with a small amount. For the uninitiated, angel investors provide much-needed capital to startups during their early stages, helping them move from concept to execution.
“Angel investing has been on a rapid ascent in India, fuelled by a convergence of factors that make it an attractive avenue for investors. The nation’s startup ecosystem is thriving with innovation and technological advancements, creating a fertile ground for early-stage investment. Remarkable success stories of startups evolving into unicorns have captured the attention of both local and global investors, contributing to the heightened interest in angel investing,” says Teja Ramineni, co-founder and director, Avenue Finworks LLP.
Why is it picking pace
Various factors have led to the boom in this asset class. For instance, the government has also introduced various initiatives to promote entrepreneurship and innovation. “Various schemes create a favorable environment for startups and investors by offering tax incentives, funding support, and simplified regulations,” said Somdutta Singh, founder and CEO, Assiduus Global. “Governmental support, exemplified by initiatives like ‘Startup India,’ has fostered a business-friendly environment with incentives and tax benefits for startups, making angel investment an enticing proposition,” added Ramineni.
Experts say that the success of several startups has attracted attention not only from domestic investors but also from global ones demonstrating the potential for high ROI. The additional value of mentorship and industry connections that angel investors provide to startups cements their role in the ecosystem’s growth. “Finally, angel investing allows individuals to diversify their investment portfolios beyond traditional asset classes like stocks and real estate. This diversification is particularly appealing in the current rapidly changing and evolving economic landscape,” said Singh.
4 key things to remember before venturing into this asset class
Aspiring angel investors should bear in mind the following three fundamental considerations before delving into this asset class.
Be aware of the high risks
“Firstly, recognizing the inherent high risk associated with angel investing is crucial. Investors should embrace risk mitigation strategies,” said Ramineni.
Venturing into angel investing is an exciting but inherently risky endeavor mainly because it involves investing in early-stage startups, which have a high rate of failure. “On the flip side, successful investments can offer substantial returns. Be prepared for both outcomes and only invest what you can afford to lose,” said Somdutta Singh, founder and CEO, Assiduus Global.
Diversify across sectors
Given the high-risk nature of startups, diversification is essential. Diversifying investments across startups and sectors is one of the key risk mitigation strategy one could adopt. “Spread your investments across a variety of startups in different industries rather than putting all your eggs into a single basket. Mitigate the impact of potential losses,” said Singh.
Conduct due diligence
“Conducting meticulous due diligence is paramount. This involves in-depth research into the startup’s market viability, business model robustness, team expertise, and competitive landscape,” says Ramineni. “The investment in the angel segment should always be through SEBI registered angel fund so that the due diligence is strong and their money is safe. None of the angel networks is regulated and so it it important that Angel investors do only through angel funds rather than angel networks,” said Milan Sharma, founder and CEO, 35North Ventures, a VC Firm based out of Mumbai.
Patience is key
Lastly, maintaining a patient and long-term perspective is essential as angel investments often entail prolonged timelines for returns due to the startup’s growth trajectory and the potential timeframes for exits. “Venture investing is different from the stock market as the investment is illiquid as compared to markets and the investment horizon should be at least five years plus to make good returns in this asset class,” said Sharma.
Somdutta Singh, founder and CEO, Assiduus Global shares some more tips
- Research meticulously, their business model, market potential, competition, leadership team, financial projections, everything that can impact your investment.
- Ask tough questions about their strategy, milestones, and potential challenges.
- Understand the potential exit strategies for your investments. These could include acquisitions by larger companies or the startup going public through an IPO.
- Knowing how and when you might be able to liquidate your investments is important.
The above factors collectively provide a strong foundation for navigating the intricacies of angel investing in India’s dynamic startup landscape.