What if you have a solid business plan where you have done your research, made your strategies and the roadmap of the whole business but as soon as it comes to the investment you do not have enough capital. You plan to take money from the bank but as soon as you reach there you find out that bank requires financial documents of your business, profit records and other documents which you don’t have yet. You turn towards your family and friends for financial help but they only have a limited amount for help that does not justify your business expenses. How can you get these required funds for your business?
Here comes the Angel Investor, someone who can look at your business model and help you with the strategy and finances. Want to get a more clearer picture regarding Angel investors or how angel investors works, in this blog we will look about What are Angel Investors, its definition, characteristics and advantages.
What are Angel Investors?
So, what is an angel investor? In a very simple term Angel investors are generally wealthy people who invest their own funds into a brand new business or company looking at your idea and its practicality and in return they take a small share of the company also known as Equity. The money put into your business is not a loan that needs to be repaid along with the interest. An angel investor after getting the enquiry becomes a partner in the company and only gets money if there is an overall growth in the company and it starts to earn profits.
Angel Investors are generally different from Venture capitalists, though they both invest in new companies angle investors generally use their own funds making decisions faster due to personal decisions on the other hand Venture capitalists manage a large pool of money from different people, usually delaying the process and decision making in the company.
What are the Characteristics of Angel Investors?
- Angel Investors are mostly successful entrepreneurs themselves, they have experience of building the companies from scratch and later on selling them. Some of the angel investors are top-level executives from big corporations. For example: Kunal Shah founder of Cred and Anupam Mittal founder of shaadi.com are some of the famous angel investors in India.
- Angel Investors not only provide funds to new companies or startups but with them comes experience, wisdom, and market contacts to these new ventures. Angel investors can help new companies with smart guidance, steps to avoid common mistakes and introduction to market communities helping new startups get buyers and investors, this is why money taken from angel investors is called Smart Money.
- Angel investors are not afraid of risk as they know most companies start and fail, but for them putting money into a risky venture is better because with high risk comes high profits and they believe in the founder’s confidence and vision.
- For some angel investors money is not the real game if some startups solve core problems of the society or startups have passion for building new things angel investors join this approach to help the next generation startups evolve.
Read Also: Types of Investment in the Stock Market
How Does Angel Investing Work?
New startups’ first step is to look for investors, this can take place from platforms like Indian Angel Network, LetsVenture, or AngelList India or startup events. Once a startup founder connects with the investors they are required to pitch their idea. In “Pitch” founders present their business idea, team, how they’ll be solving the problem and most importantly how to make money out of it. If your pitch is accepted, investors will do their homework known as due diligence. In this they will figure out the business model, financial forecast and your valuable team. If everything goes positive the investor will offer a “term sheet”, which is a basic terms of investment like how much money will be invested by the investor and how much equity will they take. Once both the parties agree to the terms and conditions, the legal team will draft the final papers and once it is finalised and signed the money is transferred to your company’s account, and the partnership officially begins.
The Accreditation of Angel Investors as per SEBI
In India, Securities and exchange board of India (SEBI) takes the monitoring charge of these investments. To make these investments safer and organised SEBI has set some rules and created Accredited Investors.
Accredited Investors get an official tag of Accredited Investors and they need to meet certain financial criteria that is an annual income of at least Rs.2 crore or at least net worth of at least Rs.7.5 crore, with half of it in financial assets.
Let’s look at some new key changes in the rules set by SEBI:
| Feature | Old Rule | New Rule |
|---|---|---|
| Who can invest? | Individuals with a self-declared net worth of Rs.2 Crore. | Officially verified “Accredited Investors” (AIs) only. |
| Investment Amount | Min Rs.25 Lakh & Max Rs.10 Crore per startup. | Min Rs.10 Lakh & Max Rs.25 Crore per startup. |
| Per Startup Investment | A fund could invest a maximum of 25% of its money in one startup. | No limit. A fund can now invest as much as it wants in a single promising startup. |
| Lock-in Period | Investment was locked for 1-3 years. | Reduced to as low as 1 year for some investments. |
Advantages and Disadvantages of Angel Investing
Advantages of Angel Investing
- Angel investors provide the initial crucial funding to new companies and startups along with their valuable guidance.
- The money funded is their own money, leading to quick decision making for your business.
- Angel Investors help in getting into new business communities, other investors, customers and potential employees for your startup.
Disadvantages for Angel Investing
- For getting funds you need to give the investor some share or equity of your company, if the startup becomes a huge success , this piece could be worth a fortune.
- Investors say in every big decision of your business, if the goals do not align this could be challenging for both.
- Not choosing the right investor who has the right experience of your business or industry can be fatal for your business.
Read Also: The Art of Value Investing: Meaning and Strategies
Conclusion
Angel investors are the chance takers on one’s passion and dream, providing them the initial investment to new startups. For an entrepreneur they can be a game changing partner with their advice, experience and money.
But it comes with ownership and control of your business and with new SEBI rules investing is now more structured along with opportunities and challenges.
Angel investment is a partnership, where a founder and an investor share the same passion and trust, to build something incredible together.
Frequently Asked Questions (FAQs)
At what stage of start up one shall look for an investor?
The best time to look for an investor is at the very beginning, often known as the “seed” or “pre-seed” stage, a stage where your business is just an idea.
How much money can I get from an angel investor?
A standard investment amount by an angel is usually between Rs.10 Lakhs to Rs.2 crores.
Do I have to return the money or pay any interest?
The amount invested by the angel is not a loan, it is an investment so you don’t need to pay any interest or money back to the investor, the investor gets ownership (equity) in your company.
Where can I find angel investors in India?
You can look for angel investors on AngelList India, LetsVenture, and via various startup communities like Indian Angel Network (IAN), some startup events can also be beneficial.
After pitch selection can I say no to an angel investor?
Yes you can if you feel the investor is not the right fit for your company or industry.
