What you need to know about becoming an angel investor in India

Individuals can become angel investors in two ways. First, they can source ‘direct deals’ or investment opportunities in startups through their own social network. Second, they can join platforms dedicated to angel investing such as Angellist, Mumbai Angels and Let’s Venture. These platforms provide avenues for startups to approach individuals for angel or seed funding. Post-pandemic, most platforms conduct their operations online. Entrepreneurs pitch ideas to startup investors over Zoom and other online meeting channels and investors then decide whether to invest. The angel round is the very first round of funding for a startup that is typically followed by venture capital rounds such as Series A, Series B and so on. Venture capital rounds are generally followed by late stage or pre-IPO funding and ultimately followed by an initial public offering (IPO).

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The big advantage of entering a company at angel or seed round is the ability to gain from its growth long before it becomes publicly listed. The big disadvantage is a much higher level of risk. However, going through an angel platform can reduce the risk. Typically, these platforms perform an initial round of due diligence before startups are allowed to pitch and even after investment they perform additional checks and monitoring of the startups. According to Nakul Saxena, head – fund strategy & investor relations, LetsVenture, the platform provides a strong curation process, performs due diligence, manages fund accounting and portfolio information for the investors and protects investor rights, “We used to get 50-60 new investors every week till 2021. Last year that number doubled to 100-120,” he added.

Both Let’s Venture and Angellist, another startup investment platform, operate through the ‘Angel Fund’ structure. Angel funds are Category I Alternative Investment Funds, regulated by Sebi. These funds require you to have a minimum net worth of ₹2 crore (excluding your primary residence) and you must invest a minimum amount of ₹25 lakh in the fund. “Apart from money you should have access—the ability to help founders with your personal and professional network and the ability to analyse deals. This is not a passive investment by any means,” said Utsav Somani, partner, Angellist India.

However, some wealth management professionals remain sceptical. “Angel investing suffers from an adverse selection problem. Startups want a single large cheque than multiple small cheques (multiple small investors) and so their first preference is ultra high net worth individuals (HNIs) or funds. The deals that come to smaller investors need more diligence and possibly expert help. Angel investments typically have a longer gestation period and need to be diversified well,” said Sandeep Jethwani, co-founder Dezerv, a wealth tech platform.

Roopali Prabhu who is co-head, products and investments at Sanctum Wealth, added a few more objections. “Only a small percentage of startups actually succeed and hence diversification across deals is important. Second, it is not a one-time investment. Startups keep needing capital in the initial stages of their existence. Investors with a net worth less than ₹100 crore should go through angel funds if they are really keen. In our case, we suggest pre-Series A investments rather than angel to reduce the risk. Many startups die before they even get to pre-Series A,” she said.

Taxation: According to Parizad Sirwalla, partner and head, global mobility services-tax, KPMG India, investments by angel investors in unlisted shares attract capital gains tax on exit. If the sale consideration is less than the prescribed Fair Market value (FMV), then the latter will be considered for tax purposes rather than actual sale price, subject to other specific conditions. As with other unlisted shares, gains made within 24 months of purchase are subject to Short Term Capital Gains (STCG) Tax which is as per the investor’s slab rate. After a 24-month holding period, Long Term Capital Gains Tax (LTCG) at 20% applies and you also get the benefit of indexation.

Mint Take: Startup investing is being democratized and presents an attractive investment opportunity. However, given the high chances of startups going bust, you should have a portfolio that is large enough to accommodate such failures. The allocation to startups also should be a small part of your portfolio since this is a high risk-high reward asset.