Every business needs funds to grow in this competitive world, and Angel Investors solve this purpose. Being a startup, securing angel investments from the right investor increases growth opportunities. Although most ventures seek larger investments at an early stage, angel investors offer more flexibility and may become mentors in the long run.
In the past few years, we have seen that many people are unclear about grabbing the attention of angel investors and secure investments. So, in this article, we will explain 6 key steps for Angel Investment.
What are Angel Investors?
Angel Investors are ‘Angels’ for startups who need funding to run their business smoothly in exchange for some percent of their company’s equity. Angel investing is an act to offer funds to startups in their early stage and help them become market pioneers in the long run. In this process, Angel Investors need to thoroughly understand the business plan of the startups and do the necessary due diligence before they decide to invest in a startup. Once a deal is done and investment is made, angel investors may hold up to 0.1% to 50% (or more depending on investment) of their company’s equity.
An Angel Investor could be:
- A person with early-stage investment experience
- A person with experience working as a serial entrepreneur
- A senior management professional with 10 years of experience in this industry
Platforms like Inflection Point Ventures (IPV) aims to democratise angel investing; that’s why their minimum investment amount is much lower, i.e. 2.5 Lakhs INR. These platforms have made it easier for people to start their journey as Angel Investors. So, if you have funds and want to invest them in a startup, you can become an Angel Investor.
Angel Investors invest in small businesses or startups to increase their growth ability. They will provide cash infusions and contribute to the startups path to profitability. However, the funds provided by angel investors could be a one-time investment, and businesses should use them carefully. The flexibility in Angel investment is a lot more than traditional opportunities, which is why many startups and small businesses are getting attracted to it.
Angel Investors lend money to startups where they see a potential of growth.
Depending on the startup type and capital requirement, it could range between a few thousand rupees to a few lakhs rupees. By working as a financial contribution, investments determine the survival rate of startups. If the startups start getting funds in their beginning stage, they will attract the target audience and support their business growth.
Angel Investors are getting very famous in India nowadays. Angel Investing might look risky initially, but it can turn out to be an investment mode with a higher rate of return in the long run. Additionally, anyone can become an angel investor, whether a businessman, doctor or accountant. You can contribute your money by helping a startup if you have funds.
Important steps involved in Angel Investment:
1. Identification of Investment Opportunities: Angel investors look for startups with good growth opportunities. The trending sectors for investing are BPP and Analytics, E-commerce, Education, Energy, Financial Services, Food and Food delivery, healthcare, IT hardware, IT products, Media content, Mobile VAS*, and Online services.
2. Screening Process: In the Screening process, the angel investors separate the companies they want to work with from all startup options, depending on their industry, like risk factors, market size, a summary of the business, and potential to grow in the long run. The angel investors may also ask some questions from the startups to understand their vision. It helps them know whether their requirements match the startup or not.
3. Reviewing Process: Angel Investors need to understand the startup’s plan, team, and story to invest in it. Therefore, various startups pitch them with a presentation, giving an overview of the business and financial needs. The pitches could be formal and informal, depending on the business’s market, and the entire selection process depends on the pitch.
4. Connecting with the startup for establishing terms: After due diligence, angel Investors approach startups if they are worth investing in. If everything goes well, they will look forward to understanding their prospective deal terms. Here, the important points like valuation, deal flow, and deal structure are discussed. The entire deal negotiation acceptance of terms are documented, and sharing outlines of the deal documents will depend on how the discussion goes.
6. Tax Implications on Investors In India: Recently, the Income-tax act for Angel Investors has been updated. According to it, an investor with a minimum net worth of 2 crores or an income of INR 25 Lakhs for three consecutive years will get a 100% tax exemption on their investment in startups above the current market value. However, the investment should not exceed more than 25% of the sum of the total investment made. The Angel Investors can avail of income tax benefits under Section 56(2)(viib) of income tax, Section 79, Section 54GB, and Section 80-IAC. All Angel Investors have to follow the tax implications while investing in startups.
With the growth of Startups in our country, opportunities for Angel Investors are increasing rapidly. Investors can provide startups with the much-needed growth capital and contribute to their development. And majorly, these 6 steps are involved in Angel Investment.
Inflection Point Ventures is a pioneer Angel Investing Firm that assists new investors to kick start their careers as Angel Investors and startups to find investments. We hope this article has given you insights into Angel Investment and its key steps.
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