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Explained: Why angel investing in India is probably not worth it

By Finserv MARKETS - Aug 3,2019
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Explained: Why angel investing in India is probably not worth it

Introduction

Brands like Paytm, Oyo, Ola, Zomato and Byju’s have become household names in India. It seldom crosses our minds that all these companies started small and scaled up with generous funding from foreign and domestic investors. In a matter of a few years, the Indian start-up ecosystem has grown dramatically to become the third largest in the world, just behind the US and China. The number of unicorns—privately held start-ups valued over $1 billion—has touched 16 in the country. This evolution would not have taken place if angel investors had not backed ambitious founders with revolutionary ideas in the initial phase.

Explained: Why angel investing in India is probably not worth it

Source: Yourstory

What is Angel Investment?

Angel investment is the very first batch of funds ploughed into a start-up idea. The investors are generally affluent individuals and in most cases are veterans from the industry. For entrepreneurs, angel investors can make the difference between an idea taking off or being a non-starter. Angel investments help ventures build pilot projects and validate their business models. In India, the ticket price at the angel investment level is mostly below 10 million rupees. Having past experience in the industry, angel investors hand hold founders in the initial phase and help them with crucial know-how of the sector.

If a venture takes off, angel investors earn handsome returns on relatively paltry investments. For instance, Ashish Gupta’s 1-million-rupee investment in Flipkart transformed into 1.3 billion rupees in a decade. But not all angel investors are as lucky as Gupta. According to a report by LetsVenture, about half of angel investors in India witness just 25 percent of their portfolio companies getting follow-up funding, which is very crucial for successful exits. News of outsized returns have attracted a lot of people with deployable capital towards angel investing, but the sector is on shaky ground.

Explained: Why angel investing in India is probably not worth it

Regulatory and Tax issues

The angel funding ecosystem has been under the gaze of the income tax department due to concerns of money laundering. A law formulated in 2012 to arrest laundering has come back to haunt start-ups receiving angel funding. Privately-held companies are liable to pay 30% tax, known as angel tax if they raise funds at a rate higher than their “fair valuation”. Several start-ups that had raised money in the past few years had received tax notices from the income tax department in 2018.

After a furore, the government relaxed norms for companies that qualify as “start-ups” and allowed them to avail angel-tax breaks. However, a lot of complicated certification is required to qualify as “start-ups”. On the other hand, angel investors too have to receive accreditation to invest in start-ups. Considering the taxation issues surrounding the sector, it is better to invest in simple financial instruments like mutual funds, which give decent returns in the long run. Investing in mutual funds has been made simpler by Finserv MARKETS’ clutter-free portal.

Dearth of Expertise

The mushrooming of start-ups hungry for funds and news of outsized returns has attracted some unscrupulous investors to the sector. Well-off individuals are rushing into the sector chasing mammoth returns, without understanding the risk profile of the investment. An angel investor has various roles and providing funds is just one of them. Entrepreneurs expect guidance and value addition, which can make or break a company in the initial stage. With angel investors with questionable credentials crowding the ecosystem, sometimes genuine investors are losing out. When people who do not have a proper understanding of the industry enter a company, their goals differ from that of other investors and the founders. This has led to entrepreneurs spending a disproportionate amount of time managing divergent angels rather than focusing on the business.

Explained: Why angel investing in India is probably not worth it

Conclusion

Tax issues and a dearth of expertise are the major issues, but several minor issues plague the sector too. The mismatch in valuations and drying up of follow up funding has led to angels getting stuck with failing ventures. Industry experts estimate that only 30% of Indian start-ups with early-stage funding secure Series A investments, which stands at about 50% in the US and China. Indian angel investors put small amounts into several ventures. This leads to ventures having to work with inadequate funds, hindering their chances of success. Getting out of a venture is difficult as the investment gets blocked without follow-up funding. If you are looking for a financial asset which is relatively liquid, invest in mutual funds. Finserv MARKETS offers hundreds of mutual fund options, with a simple four-step investment process.

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