The case for Angel Investing in India

The contribution of the startup ecosystem to the Indian economy, both in terms of wealth creation and employment, is substantial.

  • Indian startup ecosystem is the third largest startup eco-system in the world with more than 1 lakh startups.
    1. As per a study by Niti Aayog, the gig workers related to the Indian startups will account for more than 50% of the organized work force over the next 6 years.
  • Startups are also creating tremendous wealth in the country:
    1. The total value of venture capital investments in the country is approx. $ 150 b and the total value of the startups is estimated around $ 600 b as per various sources; implying a value creation of up to $ 450 b
    2. India has the third largest number of unicorns (more than 100) globally after USA and China, ahead of UK and Israel. More than 150 startups shall join the unicorn club over the next 24-30 months.
    3. As per Indus valley’s report of 2023, in 2022 alone ESOPS of $ 2.2 b were released to employees in the Indian startups and the ESOP buybacks over the past 4 years have been close to $ 1 b. With the growing acceptance of providing liquidity to ESOP holders in the minds of founders and investors, the buyback value is set to significantly increase in the coming years.
    4. Not to mention, there are many technology startups have lined up their IPOs thereby creating liquidity for their investors, founders and employees.
  • The wealth creation however in this space is out of reach of retail investors as the startup companies, especially technology startups are taking much longer to get themselves listed; most of the value capture is happening while they are still privately held. As an example, Amazon got listed after two years of founding at market value of $ 438 m but Airbnb was private for 12 years and got listed at $ 50 b to start with. There are enough Indian examples as well displaying the same trend. 
    1. This trend is even more marked out in India where the total valuation of the unicorns is more than 10% of the listed market capital. Mind you, all this has been created largely in the last ten years. The equivalent number for other countries with a developed startup ecosystem is between 3-5%.
    2. Why? Because there is a lot of capital available for late stage deals in the private markets allowing companies to avoid doing IPO, focus on growth and escape scrutiny.

So, the question is if one is not a founder or an employee of a VC firm, then how can one participate in this  wealth creation opportunity? If you have surplus investible resources, then the answer is simple – explore angel investing …

Angel investing is mainstream in India now.  It’s also democratized – implying anyone with capital, based out of any city in the country can get access to good deals.

Have a look at the illustration below about the factors that are supporting the angel investing. :

  1. Availability of good deals
  2. Supportive regulations
  3. Evolved exit eco-system
  4. Availability of experienced co-investors
  5. Established investment platforms to facilitate investments and exits

The most important point is that the pace of launch of startups is increasing. In parallel, the institutional dry powder available to invest post the seed round has also increased; this is important as these institutional investors typically provide an exit to the angel investors.

Angel investing obviously is a risky proposition; there is always a likelihood of an investment falling to zero value. Angel investment requires a level of diversification as the brutal power law applies to the returns of the startups in the portfolio. Angel investing also requires a dedicated time, and disciplined approach in evaluating the startups and managing the portfolio. Contrary to general opinion, angel investing does not require much knowledge of advanced finance, accounting and valuation methodologies; at an early stage, rather a disciplined approach to understand the fundamentals of the new business is needed.

One can expect an IRR of 25-30% on a diversified angel portfolio.

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