A former IT and Data Services strategist, Andesh is an angel investor helping develop early-stage tech start-ups. Devoted to facilitate automation in business processes and marketing initiatives, he strives to change the face of customer experience. His endeavour is to convey this crucial relevance to new start-ups, systematizing customer acquisition, which is their biggest hurdle. An expert in product development and passionate about technology, Andesh aspires to enable game altering ideas and unique, multifaceted, comprehensive solutions to problems that bother corporates globally.
Investing in early-stage start-ups in India has never been more widespread, with a record sum of Rs 746 crore flowing into the industry in 2021 – an indicator that the Indian start-up scene has positioned itself as an alternate category of investment option to the current traditional mediums such as bank FDs, equity markets, mutual funds, and so on. Founders too have become more selective about their investors, and their initial values have taken a substantial jump as evidence of this inexhaustible pool of funding.
A significant portion of the funding raised by start-ups comes from angel investors. For a start-up business, angel investors are the second most important source of funding after founders and close friends and family. They are widely regarded as having a far greater impact on the economy than venture capitalists. Now, with the power dynamic reversed, investors are looking for exposure with greater intent, whether through intermediaries or crowdfunding sites, all in the hopes of scoring the next huge bargain.
The people behind ‘angels’
During the initial fundraising boom in Indian tech in 2012-2014, accredited investors such as HNIs, family offices, and ‘super angels,’ who were prepared to take big risks for huge rewards, were the ones particularly interested in new start-ups in India.
But today that pool has expanded to include an increasing number of high-profile individuals, including entrepreneurs, venture capitalists, and even retail investors, who are enthusiastic to take part in the opportunity of angel investment. ESOP-redeeming start-up employees, affluent stock market players, financiers, lawyers, second-time founders, and even paid employees of corporations are also emerging as angel investors to get in on the start-up funding game.
But the abundance of capital is obscuring how the angel investment industry is changing long term.
The changing face of angel investment
An array of factors, including institutional and macroeconomic context, have a significant impact on how well public capital markets and the formal VC sector function and how easy it is for entrepreneurs to start their businesses and for investors to fund them. These same factors influence how angel investment markets are structured and how they develop. In India, the angel investor’s role in the capital market has partially filled the void that existed before venture capital (VC) and private equity (PE) emerged.
Despite the current funding ecosystem and the effects of the pandemic, the angel investing sector as a whole is undergoing major foundational shifts.
Diversifying angels
Angel investors are increasingly spreading their money among a broader range of enterprises and business owners, a practise known as “diversification.” There are many investment silos that reflect various areas of the economy such as consumer products, real estate, and life science. But for traditional angels and groups of angels, there used to be just one silo in focus. Now, the most effective angel investment portfolios are those that have investments in numerous silos and locations, which in turn deploy funds to diversified founders.
This means that instead of focusing just on one firm, angel investors have learned to diversify their investments among five to six other companies.
The emergence of angel networks
More people are joining organised networks and this has resulted in a higher trade flow. Organised angel investment networks get a boost from the unexpected influx of funds from new types of investors as well as syndicates, these firms pool and manage the capital of a large number of individual angel investments.
Interest from retail and recurring investors
The growth in the angel capital market is also arising because retail investors are looking at start-ups as an alternative to FDs, mutual funds, and real estate. Where start-ups have a minimum investment requirement of say 5 lacs, for instance, more and more frequently individuals pool in, say, 50,000 each to meet it.
Plus, retail investors aren’t the only ones rushing to get in on the continuing angel funding sweepstakes. There are recurring angel investors who have made large returns from IPOs and M&As and are now re-investing their surplus in angel syndicates and straight into the start-up budget.
Intensive due diligence
Prior to making a financial commitment, recurring angels are becoming more demanding in their due diligence questions and in their demands for more voting privileges. This is a result of the Covid-19 pandemic induced market fluctuations and its inherent uncertainties that, even though it has given rise to a start-up boom, has made investors more cautious and diligent.
Beyond equity financing
Angel investors are also looking for new ways to invest in tech start-ups beyond traditional equity financing. Investors are increasingly looking to use convertible notes, which allow them to lend start-ups money and then convert that money into equity down the road. Overvaluation of early-stage start-ups can be avoided until a subsequent investment round due to this, which is advantageous for both angel and seed investors.
In addition, in order to avoid dilution of their shares, a large number of start-ups are asking for bridge finance because they feel more at ease issuing debentures and convertible debt. Since angel investments often have a long exit term of 6-7 years, this gives investors more liquidity.
Angel investors have always been the backbone of the start-up world. As the sector expands, it’s going to evolve to serve a larger, more diversified market while also finding a more stable, institutionalised ground for itself.