India is the world’s third largest start-up ecosystem with over 4,200 start-ups in existence according to NASSCOM. Yet, in terms of VCs and angel networks, India compares poorly to the developed world. In the US alone, there are an estimated 1,300 venture funds in operation in contrast to a paltry 156 in India. Similarly, USA has over 900 angel networks and almost a million people who invest in early stage companies. It was in the 1960s in the Silicon Valley that angel investing kicked off when entrepreneurs of technology companies started invested in upcoming start-ups as well as providing them mentoring support. Google, Yahoo and Uber are well known examples of angel-funded firms.
As individual angel investors started to share their experiences and interact they realised that forming groups and pooling their investment and expertise would help reducing overall risk of investing and improve their ability to support their companies. These angels got together to form angel networks to co-ordinate their activities and also to delegate some of the administrative functions to their staff.
The way an angel network works, is that the secretariat identifies promising start-ups, and then passes them on to a group of members who shortlist two to three startups to physically present at the monthly meetings. If members are interested in a specific company, a select group studies the business further and negotiates the terms of the investment. Evaluation in angel network delegated to experts in the group reducing risk to individuals. In all angel networks the decision to invest and the quantum of investment remains entirely with the individual. In contrast, in the case of funds, the investment decisions and subsequent support is provided by the executive team. Angel investments typically range as a group from Rs 50 lakh to even Rs 6 crore. Post the investment commitments; there is a financial and legal due-diligence of the company. This is essentially to analyse and validate the company’s business assumptions, and also to check if its operations are within the ambit of law.
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In India, the rise of angel investing happened post the dotcom bust with successful entrepreneurs in Mumbai and Delhi forming groups. These have seen rapid growth especially from 2014 buoyed by the success of companies like Flipkart, Ola and Redbus, and have spread to other cities such as Bangalore, Hyderabad and Chennai. More recently, even tier-two metros have seen the emergence of angel networks. In India, there are both the national networks and others that are local to a city or regional. National networks with their larger size and usually bigger secretarial team are more connected to the funds and other ecosystem players. City specific angel networks could have more local knowledge to provide better support to the start-ups.
Most of the angel networks in India are set up as a not-for-profit organisations, and are managed by elected presidents or boards and run in a similar way to clubs and residents associations. More recently there are private angel clubs that have also come up that are professionally managed. This apart, there are also electronic platforms that have also come up. These are more like marketplaces for start-ups to raise money
Going forward, as offline angel networks in both for profit and not-for-profit categories, bring online elements such as video recording of pitches and live tele-conversations with entrepreneurs and investors, the differences between the marketplaces and angel networks will erode over time. SEBI is expected to come up with crowdfunding regulations similar to the ones in the western world. If and when that happens, the public at large will be able to make investments in early stage companies in a more secure way either with physical networks or with electronic platforms.