What is Angel Investing?
An angel investor is an individual who provides capital to a start-up for ownership equity or convertible debt. They back early-stage start-ups that have high growth potential and high risk. Angels are high net worth individuals who want to expand their investment horizons by backing start-ups that show promise and profitability. While most angels are accredited, the definition has broadened with more and more people showing interest to expand their investment portfolio.
It is common and advisable for Angel Investors to gravitate towards industries and businesses that they understand and might have prior experience in.
How Does Angel Investing work?
Typically, in debt financing, a start-up borrows money from a creditor, and is repaid in the future with interest. Angel Investing is very different from this. When an Angel Investor funds a start-up, no debt is created, and no money has to be repaid.
In Angel Investing, the investor receives an equity share in the company depending on the capital invested. Most of the time, businesses that receive Angel-funding already have their revenue and cash flow in place. They require funding to kick start their business and take it to the next level.
Steps to Become an Angel Investor
1. Meeting accredited investor standards
The investor standards are different for different countries. In India, an individual investor should have net tangible assets of at least INR 2 crores excluding the value of his/her principal residence. The investor also needs to have senior management experience of at least 10 years and an AIF (Alternative Investment Fund) or a VCF (Venture Capital Fund) registered under SEBI AIF Regulations.
An Indian Investor can fund companies in any foreign country following their FDI laws and bar of accreditation. For example, accreditation for US Angel groups and syndicates is slightly higher. Investors are required to have a net worth of at least $100000, excluding the value of their residence, or have an income of $200,000 each year for the last 2 years.
Research conducted by Angel Capital Association reveals that more than half of all Angel Investors lose some or half or all of their money. It is a high risk, high rewards situation, promising higher returns than other types of private equity.
As the start-up industry is booming, angel investing has become popular, hence broadening the horizon for even small investors to expand their portfolio into angel investing. Investing in an early stage start-up is relatively easier for highly experienced and high net worth investors, who can afford the risk and losses. For small investors, research becomes very important.
This involves quantitative research on the start-up you want to invest in, which requires an excellent knowledge of business and accounts. It is difficult to define the revenue that will be generated, but you can assess the potential growth and value through numbers. It is very important to study the annual accounts of the firm you have on your radar, the balance sheet, income statement, cash-flow statement to assess the potential in the start-up.
Consider attending workshops, seminars where you can meet entrepreneurs and angel investors to learn about their trade. Events and conclaves will help you meet entrepreneurs, see their business pitches, and understand what interests you, and what questions you need to ask.
Seek guidance and advice from serial investors to understand what kind of qualitative and quantitative research goes into finding the right start-up. For a detailed guide on finding the right start-up check our blog on that topic.
3. Join an Angel Investing group, platform or network
There are several angel groups, clubs, networks, funds, and platforms for angel investors where investors can collaborate and learn from each other’s practices. Multiple insights and varied experiences can lead to high success rates. An inexperienced Angel Investors should join a syndicate of like-minded individuals who can aid decision making in terms of deal assessment, deal construction, and risk mitigation processes.
There are several independent Angel platforms online where one can invest in new ventures individually and in groups. Most state capitals have established formal angel investing groups with serial investors with immense intellect. Instead of investing in a lot of firms blindly, you can make greater profits by putting your money in selected firms that you believe in. You can apply to be a part of The Chennai Angels, one of the most prestigious and successful angel networks in India.
4. Develop Investing Strategy
Angel Investing is just Portfolio Management, you have to mix it up, yet target the industries you have experience in. Even if you are interested in eCommerce, various industries operate under it and many new industries are emerging in eCommerce every day. Research is key to develop the initial strategy of which industries you would like to invest in and how much you will risk. Angel Investors generally veer towards opportunities associated with companies the investor is already familiar with or has been recommended by someone.
5. Evaluate Start-ups
An excellent product is not enough to attract investment. It needs to satisfy a market need, have a problem-solving quality and even then there are several other criteria to evaluate a start-up. As an investor, you are not only investing in the product, the idea, and the ROI, you are also investing in the people, their experience, and their decision-making skills.
Due diligence becomes an important part of the investment, with thorough research and verification of the company accounts, documents, vendors, customers, etc. As you interact with more and more fellow investors and entrepreneurs, you will develop judgment regarding the business model, exit strategies, takeovers, etc. Till then it is wise to take expert advice and possibly join an Angel group.
Angel investing is a skill that can be honed with time, effort, and experience. The Chennai Angels is one of the most prestigious and successful angel networks in India with serial investors from across the country, across various sectors. Join us as an angel investor and simplify this entire process.