Startup investing has been glamourised within the media by reveals like Shark Tank and headlines about numerous startups turning unicorns (a valuation of $1 billion). However, it’s historically not featured among the many basket of investments out there to people. In this piece, we discover the benefits and dangers of being an angel investor.
Individuals can develop into angel buyers in two methods. First, they’ll supply ‘direct deals’ or funding alternatives in startups by their very own social community. Second, they’ll be a part of platforms devoted to angel investing resembling Angellist, Mumbai Angels and Let’s Venture. These platforms present avenues for startups to method people for angel or seed funding. Post-pandemic, most platforms conduct their operations on-line. Entrepreneurs pitch concepts to startup buyers over Zoom and different on-line assembly channels and buyers then determine whether or not to take a position. The angel spherical is the very first spherical of funding for a startup that’s sometimes adopted by enterprise capital rounds resembling Series A, Series B and so forth. Venture capital rounds are usually adopted by late stage or pre-IPO funding and in the end adopted by an preliminary public providing (IPO).
The massive benefit of getting into an organization at angel or seed spherical is the power to achieve from its development lengthy earlier than it turns into publicly listed. The massive drawback is a a lot increased stage of danger. However, going by an angel platform can scale back the danger. Typically, these platforms carry out an preliminary spherical of due diligence earlier than startups are allowed to pitch and even after funding they carry out extra checks and monitoring of the startups. According to Nakul Saxena, head – fund technique & investor relations, LetsVenture, the platform supplies a powerful curation course of, performs due diligence, manages fund accounting and portfolio data for the buyers and protects investor rights, “We used to get 50-60 new buyers each week until 2021. Last 12 months that quantity doubled to 100-120,” he added.
Both Let’s Venture and Angellist, one other startup funding platform, function by the ‘Angel Fund’ construction. Angel funds are Category I Alternative Investment Funds, regulated by Sebi. These funds require you to have a minimal web price of ₹2 crore (excluding your main residence) and you have to make investments a minimal quantity of ₹25 lakh within the fund. “Apart from cash it’s best to have entry—the power to assist founders together with your private {and professional} community and the power to analyse offers. This shouldn’t be a passive funding by any means,” mentioned Utsav Somani, companion, Angellist India.
However, some wealth administration professionals stay sceptical. “Angel investing suffers from an hostile choice drawback. Startups desire a single giant cheque than a number of small cheques (a number of small buyers) and so their first choice is extremely excessive web price people (HNIs) or funds. The offers that come to smaller buyers want extra diligence and probably professional assist. Angel investments sometimes have an extended gestation interval and should be diversified properly,” mentioned Sandeep Jethwani, co-founder Dezerv, a wealth tech platform.
Roopali Prabhu who’s co-head, merchandise and investments at Sanctum Wealth, added a couple of extra objections. “Only a small proportion of startups truly succeed and therefore diversification throughout offers is vital. Second, it isn’t a one-time funding. Startups preserve needing capital within the preliminary phases of their existence. Investors with a web price lower than ₹100 crore ought to undergo angel funds if they’re actually eager. In our case, we propose pre-Series A investments moderately than angel to scale back the danger. Many startups die earlier than they even get to pre-Series A,” she mentioned.
Taxation: According to Parizad Sirwalla, companion and head, world mobility services-tax, KPMG India, investments by angel buyers in unlisted shares entice capital good points tax on exit. If the sale consideration is lower than the prescribed Fair Market worth (FMV), then the latter will probably be thought of for tax functions moderately than precise sale value, topic to different particular situations. As with different unlisted shares, good points made inside 24 months of buy are topic to Short Term Capital Gains (STCG) Tax which is as per the investor’s slab price. After a 24-month holding interval, Long Term Capital Gains Tax (LTCG) at 20% applies and also you additionally get the advantage of indexation.
Mint Take: Startup investing is being democratized and presents a horny funding alternative. However, given the excessive probabilities of startups going bust, it’s best to have a portfolio that’s giant sufficient to accommodate such failures. The allocation to startups additionally needs to be a small a part of your portfolio since this can be a excessive risk-high reward asset.
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