What is Angel Funding ?


What does Angel Investments mean ?
Angel investors are the investors who provide financial backing for start-ups in early stage of their ventures. They provide much required first external capital & ongoing support in the early stages of company’s existence. Angel investments are relatively smaller in size and tend to invest mostly in asset-light businesses. Such angels operate either individually or through organized funds or through formal or informal networks and are viewed as a very critical element of the entrepreneurial eco-system. They also provide the business model much needed credibility, mentoring and network access to entrepreneurs thereby playing a critical role in fueling growth in the organization & scaling up the businesses.

By investing in your business an Angel Investor is helping you to succeed but they are also putting faith in your ability to generate rapid growth so they can exit from your business again and make a good return on their investment. Depending on their assessment of the risk, an investor will expect a corresponding share of your business. The value of the business becomes higher as you start to get a track record and prove the concept and the business model. Today in India, entrepreneurial activities are booming and Angel Networks are seen as one of the prominent source of funding for firms at seed/early stage of life.

Angel Investment Scenario in India
Over last few decades India has gone through many dramatic socio-economical changes. From the so called “Hindu Rate of Economy” to the brink of collapse in 1992 & returning to a high growth path in 21st century, India has witnessed transformational cycle of economy. With its rapidly growing middleclass population, the question is loud & clear. How will this country of 1.2 Bn people be able to provide gainful employment (apprx 1-1.5 crore every year) to its ever increasing young population? For such large-scale employment generation, accelerating entrepreneurship and business creation is crucial. India ranks low on comparative ratings across entrepreneurship, innovation and ease of doing business. Stringent regulations and time consuming procedures which are in place are restrictive in nature. Thus there is a dire need to foster the spirit of entrepreneurship in India and provide them with the needed support. One of the most important factors in this is “Angel Funding” ie. the risk capital required in the initial phase of business.

The angel investment concept in the country is in nascent stage. Angel investors drive significant early-stage investments in countries with high entrepreneurial activity. However in India, lack of angel or seed funding has prevented growth of start-ups. This is a critical issue since it’s during the initial stages of a start-ups lifecycle when funds can help nurture blockbuster products & business ideas.

 

Country Apprx No of Startups / Early Stage Funding Apprx Amount of Funding $ Mn
US 66000 20000
UK 3000 NA
China NA 75
Canada NA 40
Israel 1500 NA
India 50 2

For decades Angels have been the backbone of Entrepreneurial ecosystem in the west. Some of the interesting facts are listed herewith. As a proportion of early-stage investing angel investments in India is at very low level as against around 75% in the US. For decades Angels have been the

 

 

 

2012 was a year of contradiction for Indian Angel Investment Industry while in 2011, Angel Investors in India invested only about Rs 100 crore. The one reason is that organized angel activity in India began only in 2006 and hence offers huge headroom for improvement as well as promising value investment opportunities for angel investors.

Slowly the winds of change are blowing over this market. The Angel Investing market has been witnessing momentum in last few quarters & has started evolving in unconventional ways to fill the gap. Since last few quarters, Angel Investors have already become a noticeable source of funding for start-ups. This momentum is expected to continue further as more angel networks are being started and existing groups are increasing their angel base.


Government Role & Taxation
The most critical need of early-stage businesses is favorable government policies which have an impact on the entire lifecycle of the entrepreneur as well as on other elements of the entrepreneurial ecosystem. It is important that government recognizes the distinct nature of entrepreneurial system and early-stage investors to foster the growth of businesses.
Some of the important aspects of government role are:

  • The Government has started to contribute as an angel investor to help SMEs through its "Credit Guarantee Fund Trust for SME" which allows banks to grant loans up to the sum of Rs. 1 crore to small enterprises without any collateral or security.
  • Budget 2012 proposed to tax the capital infusion by Non-PE/VC investors above fair value at 30%. This tax proposal is likely to hit the angel investors considering that the fair market value at start-up stage may not be determined accurately.
  • Recently in 2013 Budget, Government proposed to recognise Angel Investors to be registered under SEBI AIF Category I which has tax pass through status. This removes ambiguity, avoids double taxation & offers some relief to this industry.
  • Government set the committee which recommended the Central Government to set up a National Entrepreneurship Mission whose sole focus will be to establish a vibrant entrepreneurial eco system in India & provide necessary funding convenience
  • FM proposed allowing SMEs & start-ups to list on the exchanges without mandatory IPO process pursuant to which SEBI is expected to launch a separate platform for the same. The move is aimed at providing a certain level of liquidity for early stage investments in SME/ start-ups and will also give Angel/VC investors an additional exit route.

Finally it’s the Government who controls the business activity in the country through its regulatory powers. The Indian Angel Investing Industry is at a juncture where there exist a need to develop  supportive fiscal policies & simplified regulatory architecture with an aim of making growth of entrepreneurship a national priority which would entail a fundamental transformation of the role of government into facilitators for new businesses.

The current ecosystem in India suffers from issues of lack of co-ordination & coherence between different stakeholders. Also availability of capital is a key pre-requisite of thriving entrepreneurial activity & creating a vibrant entrepreneurial ecosystem. Thus there is an urgent need to bring these stakeholders together through organized Angel Networks to provide better mentoring and networking for entrepreneurs across the country. In this way, Angel Investors can understand the opportunities available for investments & pool their money as per the risk & return appetite. The policy measure like recognition to Angel Investments & separate exchange for SMEs & Startup will prove to be the key steps in taking this industry to the next level


Way forward
The current ecosystem in India suffers from issues of lack of co-ordination & coherence between different stakeholders. Also availability of capital is a key pre-requisite of thriving entrepreneurial activity & creating a vibrant entrepreneurial ecosystem. Thus there is an urgent need to bring these stakeholders together through organized Angel Networks to provide better mentoring and networking for entrepreneurs across the country. In this way, Angel Investors can understand the opportunities available for investments & pool their money as per the risk & return appetite. The policy measure like recognition to Angel Investments & separate exchange for SMEs & Startup will prove to be the key steps in taking this industry to the next level

Entrepreneurship-led economic growth is always more inclusive and typically does not involve exploitation of resources. India’s entrepreneurial growth can be accelerated by creating a conducive condition for the Industry. What is needed is a catalytic regulatory environment, adequate capital flows, open minded support from businesses and society, appropriate early stage mentoring.

 

 

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