Decoding The Rise Of Angel Networks In India

Angel networks are one of the oldest investor ecosystems in India. As a foundation stone to India’s 60K+ strong startup ecosystem today, the angel networks have played a key role in organising India’s unstructured angel investing landscape since 2006.

Despite this, much is yet to be done and there are challenges galore for this class of investors.  This is especially when an increasing number of other investors, such as PEs and VCs, are tweaking their investment thesis to get their hands on every possible bet in the promising startup realm.

Not so long ago, angel investing was all about inviting three to four startup founders to pitch over a Sunday breakfast.

However, this changed as the Indian startup ecosystem started to grow at a breakneck speed, and the fear of missing out on high-potential startup deals pushed many angels to venture out for their next big bets, deferring Sunday breakfast or brunch appointments with friends and startup founders.

The days of operating in silos were soon over, and it was time to expand horizons.

“Post-2016, we were forced to push ourselves through a massive change. We realised that if we continue to work as a group of friends investing with limited focus, we will not survive,” Mumbai Angels’ cofounder Nandini Mansinghka said.

According to FAAD Network’s cofounder Dr Dinesh Singh, before starting an angel network in 2019, he had to learn extensively about the startup ecosystem via networking events, connecting with startup founders and investing at his own risk.

“We were not even aware of the existence of the Indian Angel Network for a long time, which could have saved us from the first few risky bets,” Singh said.

Such are the stories of change that many angels had to go through this litmus test to stay relevant, and Singh and Mansinghka are just two of many examples.

In the face of rising challenges currently, such as VCs dominating the early stage investing and the growth of ‘informal’ investor groups, the time seems ripe to up the ante in the angel investing arena once again.

Speaking with several angel networks, we learnt more about the challenges that are stacked up against these investors, and this is what we comprehend:

• Micro VCs Have Started Dominating The Early Stage Startup Game: A growing number of micro VCs have started making a strong headway into the pre-seed to seed stage funding segments, writing smaller first cheques between $100K and $500K, which angel networks too offer to startups. In a bid to stay relevant, angel investors will now have to act sooner than required.
• The Growth Of ‘Informal’ Investor Groups: After the funding bull run of 2021, smaller groups of angels or closed private networks have started to breed. These groups lead deals on WhatsApp via syndicates, thereby crowding the ecosystem and impacting the credibility of deals.

These key headwinds have significantly impacted the angel deal participation.

Nevertheless, India currently fosters over 125 angel networks, which is expected to cross the 200-mark by 2030, according to the Inc42 Investor Landscape Report 2023.

Further, angel networks in India are estimated to grow at a forward CAGR of 7% between 2023 and 2030. And as far as the number of deals is concerned, angel networks, platforms and syndicates have backed 470-plus startups since 2014.

The Rise Of Angel Networks In India

In the early 2000s, angel networks not only positioned themselves as the first external source of capital for new or emerging entrepreneurs but also bridged the funding gap between individual angels and institutional venture capitalists (VCs).

As the torchbearers of angel investing in India, these networks also encouraged HNIs and successful entrepreneurs to enter the world of startup investing by giving access to good startup deals at relatively smaller amounts.

“I started my angel investing journey in 2014 when I joined Indian Angel Network. At that point in time, there were only two networks, IAN and Mumbai Angels, …and probably every big CXO who understood investing or had some exposure to the US markets were part of the ecosystem,” Abhishek Agarwal, founder & managing partner of Rockstud Capital told Inc42.

As angel networks gained weightage, another class also gained attention during this period. This class of investors acted as a syndicate to help individual angel investors, informal angel groups and even recognised angel networks manage deal flows, due diligence, and transactions for a small fee.

Another big step was taken by the Securities Exchange Board of India (SEBI) in 2013 to organise the scope of angel investing in India. The market regulator added angel fund as a sub-category to invest via registered AIF CAT I angel fund. This structured the entire angel investing process and added a layer of transparency to the deal process.

“In the last few years, a lot of people started forming groups in every nook and corner of the country, calling themselves angels. The segment is so crowded that it has become difficult to track all of these investments. The steps taken by SEBI were much-needed to protect investors’ interest and increase credibility in the ecosystem,” said Pooja Mehta, chief investment officer, JITO Incubation and Innovation Foundation.

Some of the key angel networks, platforms and angel syndicates that have opted for SEBI CAT I AIF Licence (VCF/Angel) are Ah! Ventures, AngelList India, Indian Angel Network, Lead Angels, LetsVenture, Climate Angels Fund, and FAAD Network, among others.

Prior to 2016, most VCs chased startups with established product-market fit and looking for growth capital. For instance, logistics tech startup Loginext raised its seed cheque of $600K in 2014 from Indian Angel Network and others, while top VCs such as Tiger Global Management and Steadview Capital only entered at Series B stage.

Also, most startups were more keen to have individual angels who can mentor and guide them. For instance, LogiNext had 12 individual investors on its cap table, apart from IAN, Singapore Angel Network and GenNext Innovation Hub.

However, post-2016, both startups and investors have become more mature. While VC funds have started to catch them (startups) young, the Indian accelerator and incubator ecosystem, too, has evolved to offer mentorship and networking capabilities to startups.

In addition, startups now want their cap table largely clean, with fewer stakeholders. This has pushed angel networks to adopt a more structured approach of taking end-to-end responsibilities like a VC firm.

The Story Of A Rigorous Change

As it is evident by now that Indian angel networks have gone through a number of transitions since 2006. Here’s how they have now evolved to pound the Indian startup cap table with a bigger bang.

Speaking with Inc42, multiple angel networks have highlighted these changes:

A Change In The Mindset: The first change angel networks embraced was to assert themselves that they were not just aggregators to connect angels to startups but rather platforms that take end-to-end responsibility from deal sourcing to finalising them. Further, they started to focus on becoming asset managers, managing a specific asset class — startups— thereby working to earn returns for their members. This led them to charge an entry fee for every deal, similar to institutional investors.

Rewriting The Definition Of Investing: Even though the Indian angel network ecosystem maintained the positioning of being the source of the first external cheque for startups, they rewrote the definition of investing from ‘investing to help startups survive’ to ‘investing to build a future asset class that can forge great returns for all stakeholders’.

Changing The Angel Way Of Investing: Initially, angel investments were largely based on references and their relationship with other angels. However, this has now changed as an increasing number of angel networks today put emphasis on making individual angel investors learn about the risks associated with their startup investments to make informed bets.

A Sea Change In The Investment Thesis: Earlier, there was no fixed process for investing in startups. However, soon angel networks started to change this, asking members to commit a certain percentage of funds towards the startup portfolio they are looking to create.

“At Mumbai Angels, we recommend individual investors to allocate anywhere between 2% and 10% of their overall portfolio to the early stage and then invest money in 30 to 50 companies,” Mansinghka said.

This ensured that the members diversified their portfolios and put funds in a disciplined manner rather than exhausting all of it on a few companies.

What Will New LPs Choose — Micro VCs Or Angel Platforms?

Both angel platforms and micro VC funds don’t have much difference in their investment thesis. Both invest at a pre-revenue and bootstrapped stages, with small ticket size and offer value additions to startups such as network capabilities and mentorship.

This poses a big question for LPs and new investors entering into the ecosystem – which side to pick?

According to Rockstud Capital’s Agarwal, micro VCs are a better choice for experienced investors as they can avoid over-diversification and earn good returns with minimal involvement. On the other hand, new investors looking to meet new startups and understand the ecosystem should look towards angel platforms for better exposure.

However, FAAD Network’s Singh and JITO Angel Network’s cofounder Mehta believe that both will go hand in hand and mostly there will be collaborating and co-investment opportunities.

“This will further improve the Indian early stage startup ecosystem with huge capital infusion and help founders build businesses and make entrepreneurs settle for right valuation,” Singh added.

What’s Next?

The angel networks that Inc42 spoke with unanimously agreed that angel investing, either individually or as part of a network, is not for everybody.

With the booming startup ecosystem of India, it is expected that large investors and HNIs will start allocating a certain part of the overall portfolio to angel platforms. That’s when the multiplier effect is expected to happen.

However, angel platforms must ensure that the rules of the investing game are of global standards. Also, anybody who enters into this has to have the stomach and the financial muscle for two things – the risk of getting zero returns and the ability to play the waiting game to get an exit.

Not just this, Rockstud’s Agarwal believes that angel networks need to evolve further in terms of improving their operational bandwidth and use tech to resolve issues emerging from deal flow and tracking.

Finally, anyone who finds angel investing lucrative will also have to understand that behind the glaze of one successful startup, there is a graveyard of 90 unsuccessful ones. Therefore, much caution is advised before stepping into the world of angel investing.