Angel investors are wealthy private investors who focus on financing small businesses in exchange for equity capital. Compared to venture capitalists, angels may also be more patient with entrepreneurs and willing to provide smaller dollar amounts over longer periods. However, they want to see an exit strategy at some point where they can pocket their profits, usually through an IPO or acquisition.
Angel investors finance businesses in many industries. According to the Center for Venture Capital Research at the University of New Hampshire, 2020 marked the first time in several years that angel-funded businesses were in the seed and seed stage. Total investment during the year was $25.3 billion – a 6% increase over 2019.
Advantages of angel investors
Having an angel investor means your business does not have to pay back the funds because you are giving away equity in exchange for the money. Angel investing is usually reserved for established businesses beyond the seed stage. These companies have shown promising earnings but still, need capital to develop products or grow. Because it is angel money, they can be highly motivated to help you succeed through mentoring or offering direct management assistance.
Provide additional funding
Startups often need access to additional funds immediately. With an angel investor, startups can access significant amounts of money when they need it most. Having an angel investor for additional funding is also a good way to find other angel investors to invest in your business. And if your business is growing fast, you can easily find more angel investors to add credibility to your business.
As mentioned above, an angel investor not only puts money into a company but also adds value to the business. Most angel investors have good experience in the industry and can also provide you with contacts and support for growth.
It gives your business credibility
Angel investors are the best in their fields, they use this advantage to develop more startups. Startups can take advantage of this opportunity to work with people who are well-known in a particular industry. Angel investors act as a catalyst that significantly facilitates the growth of a startup.
Finding angel investors is not a difficult task. Several investors regularly research startups that would be worth investing in.
Make flexible trade agreements
Venture capitalists may insist on formal investment criteria, while angel investors do not follow traditional terms when it comes to deals. They are not strict and open to negotiating the terms of the agreement and therefore are generally more flexible and open to suggestions.
There are situations where angel investors invest their money in startups without any strict conditions. This is because they see their investment benefiting the brand and the local community by creating new growth opportunities and stimulating local economic growth. It is advantageous for startups to maintain a close connection with angel investors at all stages, and sometimes even after they are no longer part of their board of directors.
No monthly fees, interest rates, or fees
Another major benefit of raising funds from angel investors is that you don’t have to pay any monthly fees, interest rates, or fees for your investment. Unlike venture capitalists, angel investors receive a share of the return on investment equal to their initial investment. This happens only after the business starts generating profit.
Moreover, they can contribute to your business at any stage. With flexibility in the contracts that allow you to get the best possible deal.
It helps elevate your brand
In addition to funding, angel investors will help you elevate your brand to a degree of credibility. They can play a very big role in building your brand equity. They will help you gain access to new industry connections. Plus, when an angel investor invests in your startup, it’s usually a good reason to promote the brand partnership through a press release or email.
They can have a positive impact on the growth of your business while helping you expand your reach and brand value. There are many scenarios in which angel investors become more than investors.
Disadvantages of angel investors
One big downside is that angel investors typically want 10% to 50% of your company in exchange for funding. This means that business owners can lose control of their business if angel investors find that they are preventing the company from succeeding. It is important to think about how much equity you want to give the investor to fund because if you give too much, you may no longer own the company if things do not go well and the angel investor has more ownership than you.
Angel investors are very important for SMEs because they provide more than just money. They are hands-on investors and contribute their skills, expertise, knowledge, and contacts to the businesses they invest in. They are rich people with great business experience.
They are willing to invest and offer their wealth and knowledge to small and medium business owners and entrepreneurs to start or grow their businesses. Because of this attribute, many ideas cannot be realized. To prevent this, many countries are establishing angel investor syndicates (groups) and networks.
How does an angel investor make money?
Angel investors make money by backing fledgling startups they see as promising, in return for an ownership stake, and expected returns if they succeed.
Those who invest in assets that change hands at an agreed price—such as stocks, cryptocurrencies, and real estate—know when they have made a profit: they sell the investment for more money than they paid for it.
Angel investors, typically wealthy individuals who back early-stage businesses with their capital, do not have such easy benchmarks. They put their money into a startup and bet it would succeed based on meager data and their judgment. Once committed, they tie up their funds for an unknown period with no quick way to collect – if they can collect at all.
Angel investors make money as their stake increases in value and can liquidate it in what is known as an exit. But if the startup fails – as most do – the investor gets nothing and also loses their initial investment.
How angel investing works
Angels typically consider many fledgling startups and limit their investment options to a few. They then provide funding to selected startups to cover costs until the business starts growing. In return, they will receive an equity stake in the company. This is around 20% on average but can rise to 50% for a young company.
Investors and entrepreneurs can negotiate financing and equity details directly, especially in early-stage businesses. Investors can also use a company’s valuation to determine how much ownership they will take. For example, if an angel invests $500,000 in a startup valued at $2 million, the company’s value jumps to $2.5 million, and the angel’s stake in the company is 20%.
How angel investors make money by investing in a company
Angels get their return through an exit that allows them to liquidate their stake and potentially make a profit based on the percentage of the business they own. In general, investors plan the details of the exit by negotiating terms before investing in a startup.
Angels are looking to recoup their initial investment and then some. There are many types of exit strategies, the most common are:
• Acquisition – The startup is bought by another company. This usually creates a return on the angel’s initial investment, as the sellers want to make a profit for the work they put into building the company, and they want – or need – to pay back their investors.
• Fusion – A company buys a startup and merges it into an existing business.
• Initial public offering of shares (IPO) – A startup goes public by offering shares on the stock exchange. Of the plethora of startups, it has relatively few IPOs. Those who do can reap big returns because they’ve made it far enough in their startups to attract the interest and support of investment banks and attract potential stock buyers.
• Purchase of risk capital – Venture capitalists can invest in a startup after angel funding and then offer the angel investor a buyout.
• Buyout management – Startup executives can pool their resources to buy out angel capital. This happens less often than other exits.
• Preservation of equity – An angel investor may also choose to stay with their investment if the company is profitable but not planning a sale or IPO. In this case, the angel may receive a regular dividend for his ownership interest.
Most angel investments fail and businesses never get off the ground. However, sometimes small angel investments can bring big profits. Some angels put in as little as $5,000; only one invested more than $100,000. Relatively small sums yielded huge rewards: When the company went public in 2009, total angel investment was valued at around $2.5 billion.
Once an investor decides to invest, they gauge how much money to contribute and whether more is needed. The lead investor will partner with the founder to bring in additional investors. Most angels expect a formal shareholder agreement that stipulates the unpredictability of their investment. A term sheet is a document that includes the startup’s valuation, deal flow, and angel due diligence. Lawyers draft the final legal documents before any money changes hands. Everyone signs the final package before the deal is final.
Top 10 Angel Investors from India
1. Ratan Tata – Ratan Tata is a prolific investor and has made several investments in many startups. His style of investing and financing is revered by many people around the world. And his investments have been known to emerge as giants in their respective sectors over time. Ola Cabs is an example.
Ratan Tata’s investment gives startups a boost in terms of publicity, fundraising, and branding. Here is a list of startups that Ratan Tata has funded over the years. As a result, Ratan tata’s behemoth organization – Tata Group has also infiltrated several markets like telecom, software, food, and fashion. Due to his charity work, no profit from the company affects Ratan Tata’s financial statement. Ratan Tata and his family have been involved in philanthropy since the company was founded.
2. T.V. Mohandas Pai – Mohandas Pai is a Padma Shri awardee and former Chief Financial Officer and Board Member of Infosys. He is also the co-founder of Akshaya Patra, the world’s largest mid-day meal program, and actively works with government and regulatory bodies on policy recommendations and guidelines. Mohan has served as the Chairman of SEBI and is now a member of the Board of Directors of the National Stock Exchange of India.
He became one of India’s most prolific angel investors. He has helped launch over 10 different venture, growth, and public market funds. He also runs a private equity fund – Aarin Capital – along with Manipal Group chairman Ranjan Pai, which invests in life sciences and education companies. Mohan personally mobilized support from political leaders, philanthropists, policymakers, and industry leaders to launch the Akshaya Patra Foundation – a mid-day meal program for school children.
Today, the program feeds more than 1.8 million children daily in more than 16,500 schools in thirteen Indian states. It is currently the largest school lunch program in the world to end child hunger in the classroom and improve the completion of the educational program. The midday meal program stands out as an exemplary public-private partnership program. Its goal is to feed 5 million children a day by 2030.
3. Rajan Anandan – Mr. Rajan Anandan serves as the Managing Director of Sequoia Capital India. He serves as an executive director at Surge. He serves as a board member at 99RetailStreet. He also works as a business consultant at Ayata. He serves as a board member at Phantom Hands, and a consultant to Karza Technologies, India Internet Fund, Aureus Analytics, Vista Rooms, and DataWeave.
Rajan served as vice president of sales and operations for Southeast Asia and India and executive director of Google at Alphabet, also a board member at SensiBol Audio Technologies. He served as Chairman at Linear Squared. He joined Google in early 2011 to lead Google’s India business. His career includes leadership roles at Microsoft, Dell, and McKinsey & Company. Before Google, he was the CEO of Microsoft India and built India’s largest software business.
Before joining Microsoft, he was a vice president at Dell, where he held several global leadership roles, including executive assistant to Chairman Michael Dell. Before Dell, he was a partner at McKinsey & Company in Chicago. He is also the co-founder and serves as the non-executive chairman of Blue Ocean Ventures.
4. Anupam Mittal – Anupam started his entrepreneurial journey by founding People Group – a New Media & Entertainment group that includes companies like Shaadi.com, Makaan.com, Mauj Mobile, and People Pictures. Apart from his operational roles, Anupam is also one of the most active angel investors in India. He attended Boston College. Anupam Mittal made 74 investments.
Their last investment was Pre Seed Round – Strive on July 27, 2022, when Strive raised $500,000. Anupam Mittal is the Founder and CEO of the People Group and a Product Manager at MicroStrategy. Anupam started his entrepreneurial journey by founding People Group – A New Media & Entertainment group that includes companies like Shaadi.com, Makaan.com, Mauj Mobile, and People Pictures.
5. Sachin Bansal – After graduation, Sachin Bansal joined Techspan where he worked for a few months. Then he got Binny Bansal to Amazon.com and after 6 months they both decided to leave Amazon. They initially thought of starting a comparison search engine but realized that the e-commerce market in India was very small. Hence, after leaving Amazon in 2007, they started Flipkart as an e-commerce company.
Sachin Bansal and his business partner Binny Bansal launched Flipkart from an apartment in Bangalore with 400,000 rupees ($6,500) in cash. In 2007, during the early days of Flipkart, Sachin Bansal and his business partner Binny Bansal used to deliver books around Bengaluru on their scooters, and in October 2015, they turned up at some customers’ doors and personally delivered the goods to get information from online buyers.
6. Ritesh Malik – Dr. Ritesh Malik is an Indian doctor, entrepreneur, and investor. He runs a virtual Startup Accelerator in India, currently investing and mentoring 11 startups across industries. He was the first investor and mentor of FIN ROBOTICS, which became India’s first hardware product company to receive Series A venture funding. In 2015, Ritesh plans to launch his latest venture, ‘Project Guerrilla’, his vision of a premier accelerator and incubation center in India.
He is a doctor turned entrepreneur who is extremely passionate about creating products that have a big impact through the use of technology. They are at a crossroads where technology can solve many of the challenges facing humanity.
7. Anand Chandrasekaran – Chandrasekaran is an active angel investor who has backed more than 80 startups since 2015. Its portfolio includes the newly minted shares of Unicorn Deal, NoBroker, Khatabook, Scaler Academy, and Pratilipi. He has also seen successful exits – in Fynd and Netmeds when they were acquired by Reliance Industries and Innov8 by Oyo Hotels & Homes.
In his three-year stint with Facebook as director of its Messenger platform, Chandrasekaran led India’s strategy across products, technologies, and features while working on new products such as WhatsApp Payments. From 2014 to 2016, he also served as Chief Product Officer of the Indian e-tailer Snapdeal.
8. Amit Somani – Amit has over 20 years of experience in the tech and internet industry and is also deeply involved in the early-stage ecosystem in India. In his previous role as Chief Product Officer at MakeMyTrip, Amit led the entire portfolio of online products. He was part of the leadership team that took the company public on NASDAQ in 2010. Amit has also led various search, mobile, and advertising product teams at Google. One of his products (a search-based keyword tool) won the Google Founder’s Award. Before his role at Google, Amit was director of enterprise search and discovery at IBM San Jose, California.
Amit holds a B.S in Computer Science (Gold Medalist) from the Indian Institute of Technology Varanasi and a Masters in Computer Science from the University of Wisconsin, Madison. He has published several articles and holds seven US patents. When not busy mentoring and working with entrepreneurs, Amit enjoys traveling the world, being a sports enthusiast, reading, and being a fusion chef!
9. Kunal Shah – Kunal Shah is an active angel investor, entrepreneur, mentor, advisor, and well-known figure in the Indian startup ecosystem. He is the founder of Freecharge and CRED, a unicorn Fin-Tech startup from India, and is an advisor to many organizations such as Bennett Coleman and Co. Ltd. (Times Group), AngelList, Sequoia Capital, and the Indian division of Y Combinator.
He is an active angel investor investing in more than 150 startups across India from various industries.
10. Sanjay Mehta – Technology investor and venture capitalist Sanjay Mehta, 50, has become something of a star in the investment firmament thanks to some of the huge successes he has seen in his decade-long investment career. The most notable of these was the 280x return he got when he exited Ritesh Agarwal-founded OYO after being an early investor in the hotel aggregator, which is currently heading for an initial public offering (IPO).
As a private investor, he has invested in more than 150 global start-ups and seen up to four of his investments become unicorns, the only angel investor to do so. In addition to OYO, these unicorns are the crypto exchange CoinDCX and the blockchain company Block. One and the American space infrastructure developer AXIOM Space. Mehta’s portfolio performance saw an internal rate of return of 103 percent across all funded startups, compared to an industry average of around 30 percent.
Conclusion
Angel investors typically use their own money, unlike venture capitalists who take money pooled from many other investors and place it in a strategically managed fund. Angel investors who seed startups that fail in the early stages lose their investment entirely.
Angel investing has grown over the past few decades as the lure of profitability has allowed it to become the primary source of funding for many startups. This in turn has encouraged innovation, which translates into economic growth.
