Decoding The Emergence Of Angel Investing: A New Asset Class In The Making

India counts among the world’s fastest-growing startup hubs. According to the Ministry of State for Commerce and Industry, the number of recognised startups in India has increased from 452 in 2016 to 84,012 in 2022. This has urged the government to build a robust ecosystem to nurture promising startups right from the start. 

The exponential rise in the growth of startups in India has also turned many industry experts into angel investors as founders now look to extend the runway of their businesses beyond friends and family. According to recent statistics, over 9500 investors, including venture capital firms, CVC funds, investment banks, accelerators, government bodies and angel investors have backed the Indian startup ecosystem in 2022. Of these, angel investors held the largest share at 53.9% (or about 5,120 angel investors), followed by venture capital firms (23.3%), CVC funds (9.1%), and investment banks (6.0%). 

Angel investors play a crucial role in a startup’s growth, especially when it is in the seed stage. In the early stages of development, it is often challenging for startup founders, especially first-time founders, to get funds for their businesses. Traditional investors like banks and other VCs are willing to take risks only in promising startups that are on the verge of exponential growth. This is where an angel investor comes into play to provide initial capital in exchange for equity. Apart from the much-needed capital, startups get valuable guidance, mentorship and networking opportunities to grow their businesses. 

Angel Investing Gaining Prominence

The increase in the number of angel investors in the country can be attributed to the increasing number of startups. In FY21, a total of INR 746 Cr in seed capital was raised, making it an unprecedented year in the history of the Indian startup ecosystem. The change in perception that startups are no longer considered risky investments with little chance of success has had a significant impact. 

Of course, risks exist in every business. If the investors have extensive industry knowledge, angel investing can be extremely rewarding.  Having an excellent network for potential deals also allows angel investors to invest in an opportunity that helps build a good investment portfolio with a high-yielding business. 

The influx of angel investors has attracted almost everyone, from well-known businessmen to entrepreneurs, high-net-worth individuals (HNIs), and professionals from a variety of industries, including athletes and Bollywood celebrities. The chance to mentor startup founders also makes angel investing one of the most sought-after options for private investors. 

The Emergence Of Formal Angel Networks

The interest in angel investments has grown to become an asset class that has carved out its own niche in the investment portfolio. Having said that, there is a need to develop indigenous sources of funding in order to make them available to startups.

The reliance on foreign investments results in a capital outflow to other countries. As the country’s need for larger deals grows, more investors have begun to join the bandwagon, resulting in the growth of formal angel networks. This assists investors in performing due diligence on the founders’ capabilities, business models and financials of a potentially growing startup. 

Institutional Seed Funding

The angel investing landscape is evolving at a fast pace and has already witnessed a paradigm shift. VCs who are keen on investing in early-stage startups have started allocating a small chunk of their funds for seed-stage funding. 

This is giving rise to VCs exhibiting angel-like behaviour, as institutional investors are essentially a group of investors pooling money together and making an educated decision to invest the pooled money and make it a rewarding decision. Therefore, institutional investors operate in early-stage VC firms while also making seed investments to support early-stage startup growth.

Future Prospects

The rise of angel investing heralds the emergence of a new asset class and new avenues for startup diversification. New and potential investors who want to diversify their investment portfolios are also joining the curated communities. On the other hand, investor expectations from Indian entrepreneurs have risen, resulting in an increase in seed funding activity to disrupt the Indian startup ecosystem.