Leaders Speak | How angel investing is emerging as an attractive asset class in India
KV Prasad Jun 13, 2022, 06:35 AM IST (Published)
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Summary
Startups that get help from angel investors are four times more likely to succeed compared to those without their support. So, if you’re a startup, getting an angel investor can be a game-changer, writes We Founder Circle’s Co-founder Gaurav VK Singhvi.
India has experienced a remarkable rise in its startup scene, earning itself fourth place internationally for the number of startups that have received over $50 million in funding, according to Startup Genome’s Scaleup Report.
This renewed entrepreneurial energy is drawing in a vast pool of talented individuals eager to explore groundbreaking concepts. India is proactively developing innovation hubs and incubation centres, recognising the significance of entrepreneurship and innovation, as it seeks to push its economy towards progress and job growth.
Post-Covid-19, increased investor confidence in Indian startups is shown by this noticeable surge. Funding from high-net-worth individuals (HNIs) and ultra-high-net-worth individuals (UHNIs) has been received by startups at different stages of growth, indicating their growing popularity.
Here I am explaining how angel investing is emerging as a preferred investment option considering other investment options in the market.
Why angel investing
Angel investing is a great opportunity for startups, particularly when banks refuse to grant loans in the early stages. Having an angel investor provides the necessary funds for these startups to get off the ground and grow. Angels believe in these businesses and are willing to back them from the start.
And here’s an interesting fact — startups that get help from angel investors are four times more likely to succeed compared to those without their support. So, if you’re a startup, getting an angel investor can be a game-changer.
What makes it an attractive investment opportunity
According to a media report in 2022, there are more than 26000 angel investors in India. Becoming an angel investor offers numerous enticing benefits for both novices and experienced investors. Early-stage companies present an ideal investment opportunity, allowing investors to contribute to their growth and profitability.
With a focus on companies showing immense potential and room to expand, angel investing can yield substantial returns. They get a return on investment (ROI) through profitable exits.
Angel investors often gain early access to high-quality early-stage companies, offering a competitive edge in identifying promising opportunities. This privilege stems from the inherent risk in angel investments, making it an attractive avenue for those seeking higher returns compared to traditional options. Early investors often benefit from discounted rates, enhancing investment potential and opening doors for profitable deals.
In my opinion, investors should aim to build a portfolio of, at the very least, 10 startups to enable adequate de-risking.
Moreover, angel investors have the unique opportunity to forge relationships with entrepreneurs and gain insights into new and innovative businesses. This relationship-building can lead to successful marketing strategies and broader customer connections, amplifying investment impact.
Now, let’s delve into some key factors that angel investors should consider before investing:
Investment valuation and startup development stages
Assessing the value of a startup is crucial for angel investors. Use the Discounted Cash Flow Method to understand future scalability, market size, and development plans. Equally important is evaluating the capabilities of the founding team, their experience, and expertise in the specific field, along with understanding the lead investor’s role in setting the startup’s valuation.
Investors need to evaluate startups at different stages — ideation and product development. Doing so will give them vital indicators for potential success on a global scale.
Market potential and target audience assessment
Market potential is also significant. Analysing the market’s size, growth rate, and revenue potential through the Total Addressable Market (TAM) concept is important. Investors must scrutinise traction and validation in the market, including a startup’s strategy to acquire customers. But it doesn’t stop there; an investor must also look at how they’ll retain, convert to sales, and monetise customers while distinguishing themselves from competitors.
Problem-solution fit and scalability evaluation
Always look out for a good problem fit for its solution. Startups follow lean startup methodology which means they build a Minimum Viable Product (MVP) to measure its effectiveness and learn from feedback. Defining the value proposition, outlining special benefits that the solution offers to customers, is another essential step.
Business model and revenue generation analysis
Place great importance on scrutinising its business model and revenue generation and pay close attention to factors such as the rate of revenue growth, gross margin, burn rate, customer acquisition cost (CAC), and unit economics. These aspects will help you gauge the startup’s potential for success and scalability.
Intellectual property and competitive advantages
Carefully examine its intellectual property portfolio and analyse factors such as differentiation, competitive advantage, difficulty of replication, and development costs. It’s crucial for you to understand the startup’s copyrights, patents, trademarks, and domain names in order to grasp its unique position and potential in the competitive landscape.
Financial analysis and projections
When considering investments in startups, angel investors should carefully assess the financial metrics and projections. This includes analysing factors such as the monthly burn rate, revenue growth, gross margin, customer lifetime value, and EBITDA. A thorough understanding of the startup’s financial health and future trajectory is essential for making well-informed investment decisions.
Risk assessment and management
To mitigate the risks associated with investing in startups it is crucial to have an understanding of the market, technology and team behind the startup. Diversifying your investment portfolio, conducting research and staying updated on market trends are strategies for effectively managing risks.
Portfolio fit and alignment with investment strategy
Investors should carefully evaluate whether a startup investment aligns with their investment goals, risk tolerance and portfolio strategy. It is important to assess how the startup fits into your existing investment portfolio and whether it complements your investment strategy and appetite for risk.
Also Read: What angel investors look for while investing in startups
Embracing the future
In conclusion angel investing in startups is becoming increasingly appealing as an asset class. It not only offers potential but also provides an opportunity to be part of transformative innovations. However, conducting diligence and having an understanding of the startup ecosystem are vital.
By analysing market potential, evaluating intellectual property considerations and aligning investments with a defined strategy, investors can unlock the possibilities that come with investing in startups. It’s not about putting money into startups; it’s about nurturing their growth and being part of a future filled with innovation.
—The author, Gaurav VK Singhvi, is Co-Founder at We Founder Circle. The views expressed are personal.
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