Mumbai Angels, started in 2006 is the first premium Angel network in India. It provides a unique platform to start-ups and very early stage companies by bringing them face to face with successful entrepreneurs, professionals and executives who are interested in and have the funds available to invest in start-up companies. We get in conversation with Anil Joshi, President Mumbai Angels to understand how 2013 fared so far, the new SEBI regulations for Angel Funds and the entrepreneur due diligence required to get Angel Funding.
In the current fiscal year, we have invested in 10 startups in the 8 months that went so far, with 3 more in the pipeline. The major industries that saw the funding went in are eCommerce, Tech, Education, HealthCare, Apparel, Mobile Payments & Apps.
The total number of Angel Investment deals we did in 2012 was 13, so we will definitely cross that number in 2013. We still have 4 months to close this financial year and hope to do some more Angel Investing.
We receive an average of 100+ applications every month, and speak to all the entrepreneurs who apply to understand their idea. On a macro level, the quality of applications have gone up, and the distribution of applications is also across India. While the majority of chunk still comes from Metros, we start to see applications coming from Tier-2 and Tier-3 cities too.
According to SEBI Guidelines, Angel investors are allowed to be registered as Alternative Investment Funds (AIFs) — a newly created class of pooled-in investment vehicles for real estate, private equity and hedge funds. The intent is good, and I would say that SEBI has done a good job in setting a lower investment requirement to set up an Angel fund. It certainly helps to provide Angel funds with the same level of facilities as Venture Capital Funds.
The monetary criteria surrounding the Angel Funds looks good, but we still have things that need to be sorted out. The Guidelines say that Angel funds needs to be invested in a firm for at least three years, can invest in companies not older than 3 years. These points have room for correction, as Angel Funding is associated with high risk and it helps to provide a potential exit strategy to the Investor, if available.
We are confident that these issues would be ironed out in the due course, and the new SEBI Guidelines would allow the proliferation of new Angel Funds and boost the Startup Ecosystem as a whole.
If a startup raises money from an individual angel who is not associated with Angel Fund / Venture Fund registered with SEBI, the startup will be liable to pay Startup Tax. This tax is on the difference between the premium at which funds are raised and it will be treated as income, meaning approx 30% of fund raise will go toward income tax. If a startup can prove that the investment was taken on FMV or DCF (Discounted cash flow) method certified by a CA, they will be exempt from paying Startup Tax. This may deter the investors, as the entire investment is not used for growing the startup, rather a significant chunk would go to the government as Tax.
From the above, it is clear that no startup that raises individual angel funding can get really exempted, as investments are always raised at futuristic targets in mind.
We are a handful of Angel Groups at the moment, dealing with a high number of applications. The demand-supply gap is very clearly evident and that is one of the main reasons for such disparity. As Angel Investments are highly risky, the Angels tend to look at Futuristic business models in mind that are rapidly scalable. With the new SEBI Guidelines, we hope more Angel Funds will be set-up to resolve the issue in long term. Also, the Investment potential of Angels is limited, the mind set is to search for the best possible business model. As mentioned earlier, Angels are interested to invest in Futuristic Ideas – the ones ahead of their time. So, it’s a combination of demand-supply and investor interest – futuristic idea match that drives these numbers.
There are certain things to keep in mind. The Investor’s time bandwidth on assessing a startup business model is really limited, so Entrepreneurs must have a cystal clear clarity on the problem statement. With the ability to explain it in very simple terms, they must be able to convince why they are better than their competition. Good Market Research is a must, and I would say that a strong team, and a growth strategy for the next couple of years is what any Investor would look at. Also critical is the potential exit strategy for a startup.
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