As an entrepreneur, you would have come across the term “angel investing” quite often in your pre-seed funding phase. While you might have some ideas about what angel investing is, it is easy to get confused with the different funding sources available in the market. In this blog post, we walk you through everything you need to know about angel investing and how it works.
If you want information about venture capital instead, we recommend these blog posts:
- What is venture capital, and how does it work?
- Venture Capital vs Private Equity: All you need to know
- Top 40 Most Active Venture Capital Firms in India
What is angel investing?
Angel investing is the type of financing where a wealthy private investor, or group of investors, funds a startup in its initial stage of development in exchange for equity in the business. These high net worth investors are commonly known as angel investors or business angels. Unlike venture capitalists who use investment funds to finance companies, angel investors use their own money to support early-stage startups.
Most angel investors are successful entrepreneurs themselves and have expertise in the industry they’re investing in. They ideally bring mentorship, networking and contacts, and knowledge to the startup in addition to their capital investment. They also help startups get acquainted with other investors for future funding rounds. They expect and often enjoy being directly involved in managing the business they fund.
Bonus: According to SEBI, an angel investor is an individual investor who has net tangible assets of at least two crore rupees, excluding the value of his principal residence, along with previous investing experience, or is a serial entrepreneur, or has at least ten years of experience as a senior executive.
Some of India’s most active angel investors are Rajan Anandan, Anupam Mittal, T.V. Mohandas Pai, Girish Mathrubootham, and Anand Chandrasekaran. India’s most prominent angel networks are the Indian Angel Network, The Chennai Angels, Mumbai Angels Network, Venture Catalysts, and AngelList India.
Why do angel investors invest?
Angel investors bridge the gap between friends and family and the next ideal source of funding, venture capitalists. This also means they are in on a startup from its early stages and take a higher risk. Here are the reasons why angel investors invest in startups:
The first is to pay forward. That is, they want to give back to the startup community by sharing their experience with budding startups. Angel investors are known to have experience working in executive roles in startups, with some of them owning multiple startups. Their knowledge about the industry can be highly beneficial for budding entrepreneurs, and they know that.
The next apparent reason is to ensure their money wasn’t idle and earned them profits. One might argue that the angels could do that by investing their equity passively in the stock market or other asset classes. But not everyone does it solely for monetary benefits.
And this brings us to the third and most prominent reason—doing something for society. For example, Climate Angels is an angel investment syndication platform for pollution reduction and climate tech startups. That is, it is a network of angel investors who are passionate about climate change and would invest in relevant startups.
What are angel investors looking for in your startup?
Angel investors typically get hundreds of proposals for funding startups. Therefore, it is vital that your startup stands out from the crowd. Here are a few things that angel investors look for in a startup they wish to fund:
- A solid team: One thing that can help get any angel investor interested in your business is the team. Demonstrate your passion and determination to grow and scale the business. Showcasing the qualifications and professional achievements of the founders/co-founders can help build credibility.
- Tangible data: Be it the pre-funding revenue or the projected gains, be sure to have all the data in hand. The data can include your revenue growth, net income, cash flow projection, average return on investment for businesses in your industry, customer acquisition cost, and lifetime value of your customer.
- Investment plan: Show the angel investors where and how you plan to use their capital in your business. This could be for product development, team building, marketing, etc. Knowing their investment would be put to good use can give your potential angel investors the extra push to fund your startup.
- Business growth plan: Showcase the plan you have for your business. Show your product roadmap for the current funding round and be clear about what can be expected from your end. Make sure you highlight how you will be scaling up your business using data points. What would also interest potential angel investors is the traction of your product. If you can demonstrate that there is a demand for your product in the market, it is all the more reason for an angel investor to fund your startup.
How does angel investing work?
As established, angel investing involves high net-worth individuals with a knack for investing and enough capital to spare, funding startups that interest them. The process of securing angel funding can be exhausting if you aren’t prepared. An ideal angel funding process goes like this:
Imagine you have developed a prototype for your startup and are looking for angel investors to help you with research and development and market launch. You work on your pitch deck and ensure you have all the necessary details in it. This would include your vision and mission, team details, market analysis, value proposition, roadmap, and funding details, among others. Once you have the pitch ready, you start researching the most active angel investors in the market. You will easily find such pre-curated lists on the internet. However, we recommend digging deeper. Make a list of your own with all the vital details about the investors, including their investment history, industry knowledge, reputation, etc.
Once you have the list, the next step is to get in touch with the investors. Read along to see where you can find angel investors in India. After connecting with your potential angel investors, you can present your pitch to the investor and convince them to fund your startup. However, this isn’t as simple as it sounds. Ensure you know what you are talking about and are confident while presenting your pitch. If the investor seems interested, they will review the pitch as a next step. This process can involve multiple follow-up questions, reviewing the business plan, anticipating future challenges, etc. Once this process is done, if the deal is developing positively, the investors and entrepreneurs will draft prospective deal terms to ensure the final term sheet is favorable and mutually accepted by both parties. Upon deal syndication, the deal is closed with legal help.
After the deal is finalized and closed, the angel investors can begin mentorship and other activities to help grow the startup.
What are the different types of angel investors?
If you are following angel investing trends, you will see that they all invest differently. This is because there are three different types of angel investors in the market. Understanding the difference between the three is vital for any entrepreneur looking to rope in angel investors for their startup.
|Differentiator||New Angels||Super Angels||Angel Investment Networks|
|Role||Usually passive, with availability on an ad-hoc basis||Highly active in business operations and development||One angel acts as an active participant with others involved passively|
|Industry focus||Not particular about the industry but might be hesitant to go for highly tech-led ideas they can’t comprehend||These tend to be industry-focused and would be investing in the industry they have prior experience in||At least one or two of the investors would have sound knowledge of the industry|
|Alone or consortia||Typically alone, but entrepreneurs can pool together 3-4 angel investors to reach desired funding amount||Mostly alone or with peers they have a good rapport with||Angels form consortia with other angels from the same network|
Angel investors, unlike venture capitalists, are known to function alone. They collaborate with other business angels to reduce their risk and form syndications via the various business angel networks available. These groups often meet to discuss new investments, helping them understand the deals better and invest correctly. Being a part of a network also helps angel investors stay updated about startups that are outside their immediate friends and family circle. By pooling resources, Angels can screen many deals, isolate those with the greatest potential, and possibly co-invest to spread risks. In our upcoming blog posts, we will discuss business angel networks and India’s top angel investment networks.
How is angel investing different from venture capital funding?
Angel investing and venture capital funding is different in more ways than one. While angel investors fund startups that are just starting out, venture capitalists look for already reasonably established brands; this way, their risk is reduced compared to angel investors, who take a bigger risk. Another differentiating factor is the amount they are willing to invest. While venture capitalists are known to invest higher amounts, sometimes even in billions in the case of series funding, angel investors invest in the thousands and millions. While angel investors are well known to invest their own money into startups, venture capitalists typically invest the pooled money (from investors) from venture capital funds. However, no matter which source of funding you choose, the process will be hectic, and the funding is possible only if you prove the potential of your product.
Where to find angel investors in India?
As is the case with any funding source, finding the right angel investor is vital to a business’s success. In India, there are multiple places where you can find angel investors. Some of them are:
- Professional networking sites like LinkedIn
- Online websites of angel investor networks
- Mutual contacts
- Look for online resources like list of angel investors in India
To begin with, stay on top of news regarding angel investors. Many articles are written about the latest investments in the industry that also talk about the investors involved. Knowing their names can help you find them on professional networks like LinkedIn.
You can also use relevant hashtags like #angelinvestors, #angelinvesting, #angelfunding, and more to look for relevant posts from and about angel investors. LinkedIn is a great matchmaker in helping founders get acquainted with potential investors.
Another prominent place where you can find angel investors is the websites of angel investor networks. Networks like Indian Angel Network, The Chennai Angels, Mumbai Angels Network, Venture Catalysts, and AngelList India.
One of the easiest ways to get acquainted with an angel investor is through mutual contacts. Being a member of multiple entrepreneurial networks, attending meetups, and creating a solid name for your brand are all great ways to get this going.
Tips to find angel investors for your startup
Choosing the right investor is key to a startup’s growth. Here are a few things to remember while approaching an angel investor for your startup.
- Research the investor as much as you can. See what kind of companies they have invested in before. Find out what industry they specialize in and ascertain if they would be the right fit for you. The most successful angel investors tend to have years of experience in a particular industry, and roping them in would mean you have amazing mentorship to grow your startup.
- Remember that this partnership is about more than just money. Ensure the angel investor is trustworthy and that you can build a meaningful relationship with them. This would also ensure there would be no issues with IP rights. The relationship is not just with you but also with your entire team, and trust is a key factor in building successful business relationships.
- Starting a business from scratch doesn’t come without risk. And an angel investor must be willing to take calculated risks rationally. Ensure you read up on your potential angel investor’s risk appetite before approaching them with any proposal.
- Always make sure you set the right expectations from the start. This means having realistic growth estimates and ensuring that your angel investors also understand the same. Look for flexible angel investors who understand the nuances of running a business.
Overall, to avoid any mishaps, entrepreneurs should conduct a little due diligence of their own to learn more about the skills, personality, and track record of each prospective angel investor. And, remember: before you knock on the door, you need to get going yourself.
Pros and cons of angel investing for startups
While we talk more about the advantages and disadvantages of leveraging angel investing for your startup in our upcoming blog post, here are some of the key pros and cons you must be aware of:
Pros of angel investing
- Angel investors have a huge appetite for risks and are extremely flexible.
- The capital they invest in your company is not a loan, and they know they might not get back any returns if the startup doesn’t take off as expected.
- Angel investors come with years of experience that can be pivotal for your startup.
- Angel investors have a robust network of highly influential investors who can help fund your startup in the future.
Cons of angel investing
- Angel investors are not easy to find and can be quite a task.
- The capital that angels can invest in your business is often limited in comparison with other sources of funding
- Angel investors have aggressive goals and expectations from startups despite their huge risk appetite.
- Though angel investors’ capital is not a loan, they do expect a part of the equity in your business in exchange for their investment.
Angel investor exit strategies
Angel investors are used to their investments taking years before bringing them returns. And they get these returns through various exit strategies that are ideally agreed upon with the business owners while signing the deal. As we mentioned earlier, angel investors fund a startup in exchange for equity in the business. This equity is what helps them see their returns after years. Here are a few options that angel investors look at to reap their returns:
Selling to venture capitalists: They decide to sell off their stake to the venture capitalists who fund the company in the upcoming funding rounds.
Mergers and Acquisitions: They give away their equity to a bigger company that decides to buy out their shares in the business.
IPO: The company goes public with a high valuation and brings skyrocketing returns.
Remember, no matter which exit strategy the angel investor chooses, the fact remains that you will end up giving away a share of your equity and with that, a share of your decision-making power in the firm if you choose to leverage angel investing for your startup.
Is there a source of funding that doesn’t involve giving away equity?
Of course, there is a solution! We recommend revenue-based financing if you want a flexible, highly scalable, 100% digital fundraising process that requires no equity dilution. This founder-friendly approach lets founders raise funds without diluting equity, and the repayments happen as a percentage of monthly revenue. Learn what revenue-based financing is and how it works in this article.
Being India’s largest revenue-based financier, Velocity provides founder-friendly revenue-based business loans to growing DTC businesses. If you are a D2C brand looking for funding to manage your inventory and marketing needs, apply here, and get funded within 7 days.