A lot of brilliant ideas from aspiring entrepreneurs never see the light of the day in India due to capital crunch. Between the development of the rudiments of a product and the creation of a company, entrepreneurs need outside help to bridge the gap. This is where angel investors step in. They are usually wealthy, well connected industry leaders or established entrepreneurs themselves who use their own money to support disruptive ideas.
In fact, angel investments are being closely looked at by the government and policy measures to support them are being considered. This is due to the fact that for a country of a population close to 1.27 billion, it is only the creation of new businesses and increase in entrepreneurial activity which can generate sufficient employment. Angel investors, going forward, will play a huge role in promoting and sustaining start-ups till the next level towards VC funding and provide a boost to the already booming startup industry.
In the current scenario, where venture capital investors are taking a conservative view of the young Indian startups, the increasing interest and role of angel investors in funding fledgling companies is a huge advantage for the overall health of the industry.
Besides the mere support of funds (which may not be as large as what a VC brings to the deal), an angel investor brings a lot more to the table which is critical for a startup’s long term survival. There’s a constant value addition by the angel investor to the process and progress of a company in a terms of:
Wisdom – Most angel investors have been leading companies or have been entrepreneurs themselves and have gained rich experience through trial by fire. They have already travelled the road that a startup has only set foot on. So, many angels take it upon themselves to mentor and guide the startups they have put money in.
They provide great insight to the entrepreneurs on how to successfully develop and expand their business. According to a study by Harvard Business School, angel investors greatly improve the results and performance of the companies in which they invest. At least 14% to 23% survival rate in the coming 1.5 to 3 years is observed for start-ups supported by angel investors and 40% growth in employment is posted them, suggests the study.
Contacts – An angel investor is an important and constructive member of any team as he/she has build a strong network in the industry over the years, which can be instrumental in fast tracking the growth of the startup. They can connect founders with strategic partners, or a competent management team to build up the company and take it to the next level. They can also help source financial resources for a later expansion.
Even getting media visibility becomes a lot easier if the startup has been funded by a well known industry stalwart. Some well placed name dropping and subtle promotions by these angels can help lift the veil of anonymity and bring the start-up into the limelight, thus helping them gain the trust of customers and potential stakeholders in the ecosystem.
Value – Getting funding from an angel investor can gain a start-up extra visibility in the business community. They act as a validation gateway for the additional funding which entrepreneurs will need in the future. To a large extent, it is the angel investor who is able to give a fair direction to the company on whether the future of the company lies in a merger, going public, or selling out. Angel backed businesses have been known to have at least 10% to 17% higher rate of return or valuation in case of exits.
It is not just for financial gains alone that angel investors invest in these greenhorn companies. For them, angel investing is a way to get involved with new ideas and technologies they themselves believe in but may not have the time to pursue on their own. It is also their way of giving back to the ecosystem.
The likes of Binny Bansal, Co-founder of Flipkart, are already prolific in angel investment in the country, in spite of heading a company in a highly competitive segment. It is a sort of dream for them to create a flourishing startup ecosystem. Kunal Shah, founder and Chief Executive of FreeCharge says that angel funding for him is one way to learn about new business ideas.
Having the backup of an angel Investor opens up many doors for a startup. It is beyond the cost of investment to have a sympathetic ear who understands the risks, highs and lows of this rough journey and can help make the ride smoother.