Startups,Unicorns,Investment,Angel Investors • Jan. 10, 2023
Why invest through Angel Investing?
Traditionally the term angel investing accounted for someone who supported a start-up company both financially with professional experience being particularly ‘hands on’. Angel Investors are typically the first people to provide capital to start-ups to help them establish their business in the initial phases.
Some of the key reasons behind investing in Angel Investing are:
Potential for Significant Returns
Generous Tax Reliefs
Supporting start-ups that can revolutionize industries
Generating positive impact
There’s a misconception that Angel Investors incur heavy losses while investing in start-ups. Let's take an example to understand that Angel investing can help you gain exponential returns. In this article, I’ll be highlighting 3 key points.
Mamaearth: I am sure all of us have heard of the brand Mamaearth. It offers best in class skincare products to help you discover the essence of beauty with the goodness of nature. When it comes to the cosmetics industry, the majority of consumers are always concerned about how skincare products are being developed and what are the processes being followed while manufacturing such products. This is precisely the reason why the world is seeing the emergence of a new era of cosmetic products that are organic, produced in a natural way that are free of toxins and chemicals, keeping in mind the environment friendly nature.
Three reason why investors should consider angel investing
1) Phenomenal Returns:
Now let's talk about the returns generated Angel investors who invested in Mamaearth during initial years:
As is quite clearly visible by the data presented in the chart above, Investors have earned exponential returns after investing in Mamaearth.
Suhail Sameer, Vijay Nehra and Shashank Shekhar are 3 prominent angel investors who benefited immensely from investing in Mamaearth in their initial phase.
Now lets talk about its valuation w.r.t Initial Public Offering. Mamaearth is considering a $3 Bn worth IPO. At this rate all 3 who invested ₹15 Lakhs each in mamaearth in the year 2016 would make ₹ 220 Cr. each with 1463x returns at a CAGR of 329.80%.
Lets consider a hypothetical situation where Mamaearth might not be able to achieve a $3 Bn valuation despite the fact that the company got their last funding at a valuation of $1.2 Bn. Assuming, even if the company tries to list itself at a valuation worth 1/5th of the amount projected to be raised under DRHP.
From a conservative estimate, assuming the company lists itself at a valuation of 600 Mn$, Suhail Sameer would still make over ₹40 Cr. It is to be noted we have calculated this after dividing ₹220 Cr. returns by 5. This gives us over ₹44 Cr. returns at a CAGR of 211.57%.
If Suhail Sameer, as an Angel Investor had invested ₹15 Lakhs in 10 - 20 companies, the total investment would have been around ₹3 Cr. If today, after 5-6 years, even one company turns out like Mamaearth which has helped him generate exponential returns, easily enough to cover a few losses that other investments might incur, still his return on Overall portfolio would be extraordinary, resulting in excellent CAGR.
If an angel investor today invests ₹10,00,000 and in the next 5 years they’re able to get a return of ₹1 Crore, then the CAGR would be 58.49%. Here Mamaearth is giving a return of ₹100 Crores in 5 years at a CAGR of 298.11% which in itself shows the huge potential the company & its products possess.
2) Fast Scalability:
Let's look at the financial growth of the company 2016 onwards, when it got established.
One key thing that can be noticed in the chart is that the company despite incurring losses was able to scale at a very fast pace.
Secondly, as we can see from the above table, the company in its initial 5 years incurred losses before it actually took off and started generating profits.
In 2016, when prominent investors like Suhail Sameer, Vijay Nehra and Shashank Shekhar came onboard and invested ₹15 Lakhs, the company’s revenue was only ₹ 22 Lakh while both EBITDA and Net Profit were negative. Kunal Bahl and Rohit Bansal invested ₹ 69.6 Lakhs in 2017, company’s revenue was a meager ₹ 5.39 Cr. yet all of them persisted. All of them showed confidence and had conviction of doing well by investing in the company despite the company incurring losses.
There are a couple of lessons that can be learnt here:
Firstly, any potential investor needs to be aware about the background of the founder and her team, their expertise and how passionate the founder is about her company’s products.
Secondly, investors also need to keep in mind the total addressable market along with the industry the company is operating in, which will help the potential investors analyze whether the product has any potential to make it big in the market, based on the serviceable obtainable market size and competitor’s products.
3) Asset Allocation:
An angel investor’s scope for investment in start-ups should not be more than 20% or 1/5th of the funds available for investment. So, for instance, let's take an investor ‘Ram’ who has a networth of ₹10 Cr. and his annual earning is more than ₹ 50 Lacs - 1 Cr. Ram is a right candidate for becoming an angel investor as he has the ability to allocate funds to multiple startups with an average ticket size of ₹5-10 Lakhs. This way Ram, over the next 1-2 years can create a portfolio of 20-30 stocks whom he feels can generate good returns and scale fast.
This would be only 20% of Ram’s total Asset allocation. Remaining funds can be further bifurcated where 40% are invested in listed companies and another 40% can be invested in other financial instruments like fixed deposits etc depending on his financial goals.
Finally, Angel Investors might be interested to know that Planify has multiple stocks in its marketplace where budding investors can invest in top emerging start-ups.
Some key vetted start-ups include Urban Tots, Bazaar India and Madbow Ventures who not only have the capability to scale up in the next 5-7 years but also are PAT positive. Investors can gain the first mover advantage by taking bets worth ₹5-10 Lakhs and earn exponential returns in future.