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Investing in startups: An introduction to angel investing
You’re probably already aware of the different ways in which companies raise money to kick off their business operations. If you’re not, then head on over to our chapter on the funding options for businesses and startups to know more. The funding options for established businesses are quite different from the alternatives available to startups.
Angel investors are one of the key providers of funds for startup companies. Unlike other entities that provide funding, angel investors are just regular individuals with a high income or net worth. They generally tend to back companies that are just starting out, which is typically not how other lending entities operate. This makes angel funding one of the most accessible sources of capital for small businesses and new entrepreneurs.
How does angel investing work?
Angel investors find young, growing businesses through various channels such as the following:
- Word of mouth
- Business and industry seminars or conferences
- Recommendations from professional investment organisations
- Online business forums
- Local events such as chamber of commerce meetings
If mutual interest exists, the angel investor will generally interview the founders, evaluate their business investment documentation, and assess the industry in which the company seeks to operate. If they are interested, they may agree to go forward with the funding.
Once an angel investor has reached an agreement verbally, a term sheet or contract is drawn up. It details the terms of the investment, the payouts or equity percentages, the investor rights and protections, governance and control parameters, and the angel investor's final exit strategy. Once the contract is finalised, the deal is officially closed and the investment funds are released for the company's use.
Who can be an angel investor?
Now, we’ve already established that angel investors are just regular individuals with funds to invest. So, there are no regulatory restrictions on who can become an angel investor, fortunately.
As long as an individual has enough money on their hands, anybody can become an angel investor. And that includes you too. Curious to find out how regular individuals can start investing in startups? Here’s how.
How do you become an angel investor?
Have you ever provided funds to a friend of yours, or an associate, to help kick start their business? If you have, then congratulations, you’re already halfway there. The only difference between you and other angel investors is that they do this exact same activity in a more professional and organized framework.
Although angel investors are just individuals, they are quite well-connected. They tend to form networks and are usually part of organized groups. So, to become an angel investor yourself, you need to find an angel network group and become a member. That way, you are exposed to better investment opportunities. You also enjoy access to resources that you would not otherwise have, like better research into a startup’s business ideas, its potential and the financial information needed to make an investment decision.
There are several active and professional networks that provide platforms for people to invest in startups. According to a research conducted by DataLabs, there are as many as around 30 angel networks in India alone. You could start off by joining one of these angel investor platforms that you’re comfortable with. If you’re finding it difficult to choose the one that’s a perfect fit for you, take a look at the video following this chapter to get an idea of the things that you should consider while doing so.
What are some of the things that you need to keep in mind when investing in startups?
Angel investing in India can be quite a challenge for beginners. There are plenty of things that you need to consider when investing in startups. Here’s an overview of the most important aspects.
- It can be very risky: Angel investors essentially invest in nascent companies that are still in the process of stabilizing their business operations. These kinds of companies usually have little to no revenue, and may even be loss-making entities for the first few years. And if the business idea doesn’t click or take off as expected, you might even have to lose most or all of your investment.
- It can be very rewarding: On the other hand, the riskiest of investment options usually carry the maximum potential for rewards. Remember Myntra, the online fashion e-commerce company? During its initial days, the company utilized angel funding to run its business operations. And look at where it is now. Myntra was bought by Flipkart in 2014 for an exorbitant sum of Rs. 2,000 crores! So, the bottom line is that with high risk also comes the potential for high rewards.
- Invest in businesses that you understand: It is a good idea to stick to investing in a startup whose business you understand and relate to. This will allow you to make an objective assessment of its performance and understand if the business practices in place are profitable. That said, there are several angel investors who have had successes with investing in startups with complicated business structures as well.
Well, that’s about it for this chapter. Now that you’re aware of angel funding and how to become one, why don’t you check out the various online angel networks in India? In the next chapter of this module, we’re going to be looking at another unique, yet old school concept of funding - P2P lending.
A quick recap
- Angel investors are one of the key providers of funds for startup companies.
- Unlike other entities that provide funding, angel investors are just regular individuals with a high income or net worth.
- As long as an individual has enough money on their hands, anybody can become an angel investor. And that includes you too.
- To become an angel investor yourself, you need to find an angel network group and become a member.
- Before you do so, you need to understand that angel investing comes with high risks as well as the potential for high rewards.
- That is why it is ideal for beginners to stick to investing in a startup whose business they understand and relate to.
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