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Entrepreneurs turn into Investors: Angel Investors for Startups

Published: Aug 09, 2018

THE government has been consciously and continuously focusing on 'Start-up India' initiatives to curb the various economic problems of our country. New businesses and ventures have risks of success and survival more than already established businesses. People are normally afraid to make investment in new business and startups. The financial support and funding is big issue for startups. If someone shows willingness in investing funds in startup business then that person is really 'Angel' for that business. And so is the name given to this kind of funds as Angel Funds.

Angel Funds comes from Angel investors who takes take in startups. They are normally found to be very educated, experienced and rich people. In India, SEBI regulates Angel Funds through SEBI (Alternative Investment Funds) Regulations, 2012, which replaced the old SEBI (Venture Capital Funds) Regulations, 1996.

Angel Funds Vs Venture Capital Investments

Angel Funds comes at the beginning stage of any business from high net worth individuals, whereas Venture Capital Investment are made at later stage of business when business is already established in market. The Angel funds is kind of sub-category of venture capital funds with main focus on startups. Both Angel Investors and Venture Capitalists make direct investment in businesses but at different phase of its life. The Venture Capital  is generally invested by firms, companies and other business entities.

Angel funds can be arranged by way of direct equity stake in business or by way of term loan. Normally people prefer to invest Angel funds as equity funds. It is mandatory for Angel Fund to obtain a certificate of registration from the SEBI. There are 3 categories which are prescribed in SEBI (AIF) regulation, 2012 for registration. Particular category under which registration is granted cannot be changed without the permission of SEBI. Angel Fund is registered under Category I- Alternative Investment Fund. If Government of India or any regulatory of country is convinced that particular fund can have positive spillover effects on economy then, in order to give incentives, include such funds under sub-section (23FB) of Section 10 of the Income Tax Act, 1961.

Registration as an Angel Fund is done in accordance with the provisions of Chapter II of SEBI (AIF), Regulations 2012. Even an Alternative Investment Fund already registered, can apply for conversion of its category into an angel fund and the provisions of Chapter II shall apply as they apply to a fresh registration.

An Angel investor can be an individual who owns tangible assets of Rs. Two crore or more excluding value of his residence. He should have investment experience (Prior experience in investing in start-up) or experience as entrepreneur (Has been promoter or co-promoter of more than one start-up venture). He can be a senior management professional with minimum 10 years of experience.An Angel investor can be a body corporate whose net worth is at least Rs. 10 crore.

Angel Funds can create pool of funds by way of issue of units to angel investors only. It should have corpus of minimum of Rs. Five crore. Angel Funds are normally found to have raised money through private placement by issue of information memorandum or placement memorandum. Angel Funds units never get listed on recognized stock exchanges.

Angel fund investment in any venture capital undertaking or startup business can't be less than Rs. 25,00,000. The maximum investment limit is Rs. 10crore. Earlier maximum funding allowed was Rs. 5 crore. There is abar on Angel funds to make investment in associates. The investments made as an Angel Fund are locked-in for a period of one year. Funds are accepted for a maximum period of 5 years.

In order to promote the Angel Funds and to better protect the interest of investors, the SEBI formed a working committee. The committee studied the SEBI (Alternative Investment Funds) Regulations, 2012 and gave suggestions to make improvements in regulations. SEBI adopted maximum suggestions given by working group and has simplified certain regulatory provisions regarding the Angel Fund. These changes are introduced vide SEBI notification no. SEBI/LAD – NRO/GN/2018/19 dated June 1, 2018. The SEBI issued circular CIR/IMD/DF1/102/2018, dated June 29, 2018 and informed that a s per amended regulations; Angel funds can launch schemes subject to filing of a Term Sheet, which shall contain material information regarding the scheme. This Term Sheet is required to be filed with SEBI within 10 days of launching the scheme. The maximum number of angel investors in any scheme can't exceed two hundred investors.

The SEBI issued circular on October 01, 2015 to allow overseas investment by AIFs ( Alternative Investment Funds) and VCFs (Venture Capital Funds) to the extent of USD 500 million. The SEBI in consultation with RBI decided to enhance this limit up to USD 750 million and issued circular SEBI/HO/IMD/DF1/CIR/P/2018/103/2018, dated July 3, 2018 in this regard.

In order to control and regulate utilization of overseas investment limits, AIFs and VCFs are mandatorily required to report the utilization of the overseas limits within 5 working days of such utilization to SEBI. The reporting to SEBI is also made mandatory when an AIF / VCF has not utilized a part of the overseas limit within the validity period or if an AIF/ VCF wishes to surrender the overseas limit at any point of time within the validity period. The reporting time allowed in both these situations is 2 working days after expiry of the validity period or from the date of decision to surrender the limit as the case may be.

Angel funding concept is very popular in many countries, especially in UK, because of tax incentives attached to Angel funding in UK. When it comes to India, it is observed that Bangalore is the place that can be called as the torchbearer of the startup ecosystem in India but NCR is ahead of Bangalore as preferred destination for angel investments.

There are numerous examples available of entrepreneurs turned into Angel Investor. Like for example, VishwasMudagal and Co-Founder and MD Sonia Sharma of GoodWorkLabs  after establishing multi-billion dollar company became Angel Investors in 2017. Mr. ShahiReddi, an entrepreneur and founder of AppLabshas launched hisown venture capital fund

As every option has its advantages and disadvantages, so is the case with Angel Funds. Angel Funds are good source of funding but these funds generally take an ownership position in the company/venture in exchange of money invested. This option is not for those ventures or projects, where huge investments in millions are required or where very small investments of few lacs are required. This option is also not attractive for those ventures which have long gestation period or require very long term commitment of funds.

Conclusion

The SEBI is continuously simplifying the regulations for Angel Funds in terms of registration, disclosure and filing norms. I t is hoped that Angel Investment concept and structure of funding would help startup businesses to grow and promote country's economy. Just like two sides of coin, the funding of business through Angel Funds have possibility to give both good and bad experience to investor and investee. A true fisherman is the one who casts line not because he wants the fish, but because he enjoys fishing. In the same way,an angel investor should be ready to invest, not necessarily to earn money.

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