India is considered a start-up hub, there is a funding requirement at various stages of any business. You would have often come across the term ‘angel investor’, they are spoken about almost always with start-up funding or early-stage funding. This is one of the most sought-after ways to fund your start-ups. This article is a deep dive into understanding the entire aspect of angel investing.
Who is an angel investor?
Any individual who invests funds into an early-stage start-up is called an angel investor. Given that these companies are at an early stage, they do not possess a financial or revenue stream to back their business plan. Often, the angel investor chooses to invest in these businesses, as they have immense faith in the founding team and the product/service offered by the start-up. The angel investor can be associated with any profession and usually invests in businesses from an investment perspective and to associate with businesses where they will be able to contribute meaningfully towards the success of the setup.
However, there may be angel investors who demand very little or no control in exchange for the investment made by them, while there are others who may be actively involved in the day-to-day operations of the business. They tend to play the role of mentors to help build the business processes, network and revenue streams.
The risks of being an angel investor are quite significant, investing in an early-stage start-up is a leap of faith, and there may be times when the idea becomes obsolete, or the company fails to scale up as desired.
Trends in Angel investing
As per Inc42 analysis, in the year 2021, 42 start-ups turned unicorns and 11 were listed on the bourses. In 2021, seed funding worth $1.1 billion was initiated, and the average deal size for 2021 stood at $2.3 million. There were more than 50,000 start-ups which sprung up over the past few years, they are at various stages of growth. The scene continues to be encouraging to all types of investors including angel investors.
Angel funding is a type of funding conducted at the very early stages of the start-up, this can be either led by individuals or a group of early-stage investors or early-stage angel investing funds. The funding can be a one-time investment, or it could be ongoing support. The ongoing support is usually tied up with relevant milestones. The rounds of funding under angel investing are called ‘pre-seed funding rounds’ and ‘seed funding round’.
Angel financing vs. Venture Capital Funding
Although both these terms are used simultaneously whilst discussing funding options for start-ups, the stages of both these types of funding are starkly different. The similarity between these two types of funding is that under both these forms of financing, the company will give up a part of the equity in exchange for the funding. The key difference between these two modes of financing are:
- Angel investing is carried out during the early stage of the business, venture capital is typically done at the growth stage of the company.
- Angel investors could be individuals or groups of investors, venture capital firms are professionally managed firms.
- Angel investing is driven by the perceived competence of the founding members and the business idea, venture capital is driven by valuations and prospects of the business.
Benefits of Angel funding
An angel investor is probably undertaking phenomenal risk, but it comes with a slew of benefits as mentioned below:
- Angel funding is early-stage funding, which essentially means that you are among the first people to chance upon the idea, and the possibility of upside is huge.
- This type of funding is a more flexible and less formal means of raising finance, hence the paperwork is minimal.
- Angel investors have better control over the business and can act as guides or mentors to ensure that the business takes shape in a way that is conducive to its success in the future.
- For an angel investor, there is the opportunity to apply his/her existing skillsets for the growth of a new business idea and the opportunity to learn new skills is high.
Being an angel investor provides you with the opportunity of “entrepreneurship without the responsibility” as stated by Super Angel David S. Rose in his book, “Angel Investing: The Gust Guide to Making Money and Having Fun Investing in Start-ups”.
Conclusion
Angel investing is a niche, complex, risky yet highly rewarding means to enable innovation and business excellence. You may not have the time or energy to assess the start-ups that continue to mushroom in large numbers every other day. It is important that you work with the experts in this area to ensure that they bring to you the best opportunities for investments. You can reach out to experts at Tata Capital where the investment product specialist shall help you keep abreast of the opportunities, thus enabling you to make informed decisions.
06 February 2024
5 mins read
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