PreIPO,Venture Capital,Angel Investors • Nov. 29, 2022

Angel Investors and Venture Capital

2 sides of the same coin?...

Over the last decade or so, technology has reduced entire catalogues of consumer goods to devices that fit in the palm of our hands. Phones are smarter, networks are faster and more people have access to more and more information.  

Angel investors are individuals or groups who invest in early stage start-ups on exchange for ownership equity interest. Most Angel Investors have excess funds on which they seek to get a higher rate of return compared to traditional sources of investment. An angel investor is a high net-worth individual who provides financial backing for small start-ups or entrepreneurs. Often, these Angel investors are found among an entrepreneur’s family and friends. The funds that angel investors provide may be a one time investment to help the business get off the ground or an ongoing injection to support and carry the company through its difficult yet early stages.

Angel Investing is often the primary source of funding for many start-ups who find it more appealing than other more predatory forms of funding. The support that angel investors provide fosters innovation which further translates into economic growth. Although a drawback is that these types of investments are risky and usually do not represent more that 10% of an investor's portfolio. Venture Capitalists on the other hand fund well established businesses.

Sources of Funding:

Angel Investors usually use their own money unlike venture capitalists who take care of pooled money from many other investors and place them in a strategically managed fund. Though Angel investors may be individuals providing money but the way they do it is through Limited Liability Company or a venture or a trust or even an investment fund.

Types of Angel Investors:

It is important to note that there are two types of Angel Investors: Affiliated or Non-Affiliated. Affiliates are usually acquaintances of the entrepreneur like wealthy friends, family members etc. Non-affiliated ones are those who aren’t related to entrepreneurs.

Overview of the Industry:

As per some key surveys conducted by multiple news outlets, in the year 2021, 42 start-ups turned unicorns and 11 were listed on the bourses. In 2021, seed funding worth 1.1 Bn$ was initiated and the average deal was estimated to be around 2.3 Mn$. Majority of this funding is said to have been initiated by Angel investors.

In India, there are currently more than 70,000 start-ups active which shows the tremendous potential Angel investing has in India. The rounds of funding under Angel investing are called pre seed funding rounds and seed funding rounds.

There are a few key differences between Angel Investing and Venture Capital Funding. Some of the listed differences are as follows:

  1. Angel investing is usually done during early stages while venture Capital Funding is usually done during the growth stage of the company.

  2. Angel Investors could be individuals or group of investors, on the other hand venture capital firms are professionally managed firms

  3. Angel Investing is driven by the competence of founders and potential in their idea while Venture Capital is driven by valuations and prospects of the business.

A few benefits under Angel Investing are as follows:

  1. Since Angel funding is an early stage funding practice which essentially means that there is a huge potential of growth

  2. This form of funding is more flexible and less formal, hence the paperwork is minimal

  3. Angel Investors have better control over the operations and decision making of the firm which allows them to act as mentors to ensure that business takes the right shape as they might desire.

  4. From an Angel Investors perspective, this is an opportunity to apply his/her existing skill set for the growth of a new business idea. Opportunities to learn news skills are also high.

Top 5 Angel Investors in India are:

  • Rajan Anandan

  • Anupam Mittal

  • T.V Mohandas Pai

  • Girish Mathrubootham

  • Anand Chandrasekaran

Overall Angel Investing is a niche, complex, risky and yet highly rewarding business to enable innovation. Many might not have enough time to mushroom multiple start-ups, hence it becomes increasingly important for investors to work with experts in this domain to ensure that they bring the best investment opportunities to you. It will not only lead to enhancement of skills with respect to Angel investing but also knowledge of investors with respect to different industries.

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