For those who are open to taking on high risk-reward instruments, investing in early stage start-ups may be an option to consider. The ideas may often be unproven and if it pays off, one can enjoy good returns plus the satisfaction and bragging rights — to be among the first few investors in what may turn out to be a unicorn (private company with $1 billion plus valuation).
Angel investments are hot with star investors such as Ratan Tata, Rajan Anandan and Bansals betting on start-ups. According to a report by InnoVen Capital, Angel investment reached a new high in 2016. The cumulative investment by leading angel groups was ₹114 crore, in 69 deals. This implies a 2x growth (in the value and number of deals) over a period of four years.
Suitability
The investment can be in small amounts, starting with a few lakhs, going up to a few crore based on the investor’s risk appetite and conviction. Angels typically invest in very early stage start-ups and data from InnoVen shows that pre-revenue stage companies accounted for about 29 per cent of angel investment in 2016. 72 per cent of the founders, where angels invested, were first-time entrepreneurs.
While joining the league of angel investors is tempting, the risk cannot be emphasised enough. Globally, most enterprises fail in the first few years of existence. Also, these investments are illiquid. Of the 156 investments made by Angel groups during 2005-15, only 18 per cent gave investors an exit opportunity. And 75 per cent of them haven’t made it to the next round of funding. So, limiting investments to a small portion of your portfolio may be advisable.
But angel investors have the opportunity to work with the entrepreneur and the management team. They provide intellectual capital and the right connections help the business scale up faster.
Getting started
You may also have to do some financial and legal due diligence before investing. Rather than go it alone, you can take the help of registered angel groups operating in India, such as Indian Angel Network, Mumbai Angels, Keiretsu Forum, Calcutta Angels, The Chennai Angels and Hyderabad Angels. There are also online platform-based groups such as LetsVenture and OneCrowd.
As a member, one can benefit from the collective intelligence and financial strength of the group.
(The article first appeared in The Hindu BusinessLine.)