Here’s How You Can Become an Angel Investor in India

Individuals can become angel investors in two ways. First, they can get ‘direct deals’ or investment opportunities in startups through their own social networks. Second, they can join platforms dedicated to angel investing such as AngelList, Mumbai Angels and Let’s Venture. These platforms provide startups an opportunity to approach individuals for angel or seed funding. After the pandemic, most of the platforms conduct their operations online. Entrepreneurs pitch ideas to startups to investors on Zoom and other online meeting channels, and the investors then decide whether or not to invest. An angel round is the first round of funding for a startup, which is usually followed by venture capital rounds such as Series A, Series B, and so on. Venture capital rounds are usually followed by late stage or pre-IPO funding and finally the initial public offering (IPO).

The big advantage of entering a company in an angel or seed round is its ability to profit from its growth long before it is publicly listed. The big loss is a high level of risk. However, going through the angel platform can reduce the risk. Typically, these platforms do an initial round of due diligence before allowing startups to pitch and they also conduct additional screening and monitoring of startups even after investment. According to Nakul Saxena, Head – Fund Strategy and Investor Relations, LetsVenture, the platform provides a robust curation process, performs due diligence, manages fund accounting and portfolio information for investors and protects the rights of investors, “We used to get 50-60 new investors every week till 2021. Last year this number doubled to 100-120.”

Both Let’s Venture and AngelList, another startup investment platform, operate through an ‘angel fund’ structure. Angel Funds are Category I Alternative Investment Funds, regulated by SEBI. These funds require you to have a minimum net worth 2 crore (excluding your primary residence) and you have to invest a minimum amount 25 lakh in the fund. “Besides money you should have access – the ability to help founders with your personal and professional network and the ability to analyze deals. This is by no means a passive investment,” said Utsav Somani, Partner, AngelList India.

However, some money management professionals are skeptical. “Angel investing suffers from an adverse selection problem. Startups want a larger check than many smaller checks (many small investors) and therefore their first priority is Ultra High Net Worth Individuals (HNIs) or funds. Deals require more due diligence and possibly expert support. Angel investing usually has a longer tenure and needs to be well diversified,” said Sandeep Jethwani, co-founder of Deserve, a wealth tech platform. said.

Rupali Prabhu, who is Co-Head, Products and Investments at Sanctum Wealth, added a few more observations. “Only a small percentage of startups are actually successful and hence diversification in deals is important. Second, it is not a lump sum investment. Startups need capital in the early stages of their existence. investors with a net worth less than 100 crores should go through angel funds if they are really interested. In our case, we suggest Pre-Series A investment instead of Angel to reduce the risk. Many startups die before they even get to Pre-Series A,” she said.

Taxation: According to Parijad Sirwala, Partner and Head, Global Mobility Services-Tax, KPMG India, exit from investments by angel investors in unlisted stocks attracts capital gains tax. If the sale consideration is less than the prescribed fair market value (FMV), the latter will be considered for tax purposes instead of the actual selling price, subject to other specific conditions. Like other unlisted shares, gains made within 24 months of purchase are subject to Short Term Capital Gains (STCG) tax as per the slab rate of the investor. After the holding period of 24 months, Long Term Capital Gains Tax (LTCG) is applicable at 20% and you also get the benefit of indexation.

Take the mint: Startup investing is being democratized and presents an attractive investment opportunity. However, given the high probability of startups going haywire, you must have a portfolio that is large enough to accommodate such failures. Allocation to startups should also be a small part of your portfolio as it is a high risk-high reward asset.