Angel Investing: A Guide on How to Start Investing in Startups

The growing startup market is drawing immense attention from angel investors. These are wealthy private investors with the capacity to finance small business ventures in exchange for high equity. 

What if we told you that you, too, can become an angel investor with Grip? 

If you’re curious, read on to know more. This is a comprehensive guide to angel investing for beginners, covering all the basics, such as what angel investing is, who can become an angel investor, the angel investment process, the benefits and downsides of angel investing and more. 

To begin with, let us understand what angel investing is.

What Is Angel Investing?

Angel investing is a type of private equity investment in which individuals or groups of investors invest their own money in early stage or startup companies. The goal of angel investing is to help these companies grow and become successful. Investors earn a return on investment (ROI) down the line. 

Startups don’t find angel investing easily in the first place, and angel investors are not always ready to back a startup that is still in its early stages. So, Grip has come up with a great way to support this ecosystem. It has made Angel investing in startups possible for everyone. 

Who Can Be An Angel Investor?

A high-net-worth individual (HNI) who meets the standards of being an accredited investor can become an angel investor in India and benefit from investing early. You must also qualify according to the following criteria to be eligible as an angel investor:

• Experience: You must have experience in early-stage investments, may have been a serial entrepreneur or have worked as a senior management professional for a minimum of 10 years.
• Net Worth: An individual investor having net tangible assets of at least INR2 crore, excluding the value of their principal residence or a body corporate with a net worth of at least INR10 crore.  
• Risk-Taking Capability: Angel investors understand investing in start-ups is a high-risk and high-reward approach. They are willing to bet on the potential for success in the business while accepting the possibility of losing everything.

At What Stage Of Companies Do Angel Investors Invest?

Angel investors typically jump in during the early days of a company’s journey. This could be when the business is just an idea or when the startup has just started offering its product or service.

At this point, it’s common for the company to have few customers or some revenue. They might have a handful of beta users, some early adopters, or just some market interest.

Angels are often the first outside investors, coming in after the founders have used up their initial funds. Their investment is key at this stage, as it helps the startup grow when larger venture capital firms aren’t ready to get involved yet.

How Much Do Angel Investors Typically Invest?

Angel investors step in early, offering small amounts of funding to help startups get off the ground, especially when they’re not yet appealing to venture capitalists.

Venture capital firms usually come into the picture only after the startup has made some progress with the help of angel funding.

The size of an angel investment can vary a lot based on the startup's potential and how much funding it needs to grow. Individual investments often range from $5,000 to $150,000.

A typical round of angel funding might raise between $100,000 and $250,000 from 3-5 investors. In some cases, angel investments can go up to $1 million, though these larger sums are usually the result of groups or syndicates of angels pooling their money and expertise.

How Does The Investing Process Work?

There’s a well-established angel investment process, but it can get costly due to legal fees, as well as fees charged by consultants, valuers, etc. and many deals fall apart during the negotiation phase.

That said, here’s what the typical negotiation steps between an angel investor and a startup look like:

• Step 1 - Finding Deals: The first step is knowing what’s out there. Joining a syndicate or a group of investors that come together to pool their investments is ideal for this, but you can also create your own pipeline if you have a strong reputation in the industry.
• Step 2 - Screening Opportunities: Once you start seeing deals, you’ll need to filter out the ones that match your investment goals and risk tolerance. You’re aiming for low-risk, high-reward opportunities - basically, you’re searching for a needle in a haystack. This involves listening to a lot of pitches, reading countless investor decks, and doing some legwork.
• Step 3 - Due Diligence: For the deals that catch your eye, you’ll want to dig deeper. Check if what the founders are claiming lines up with reality. This step involves looking into the startup's financial and legal compliance in great detail. This is where you will need to avail the services of lawyers, financial auditors, etc.
• Step 4 - Agreeing On A Term Sheet: After due diligence, the next move is to agree on a term sheet with the startup. A term sheet covers several factors including specifics of your share in the company. This is about what slice of the company you’re getting for your investment. It should also ensure employee options don’t unfairly dilute your share and clarify liquidation preferences. An anti-dilution clause is key here, ensuring you don’t lose out if the company sells shares at a lower price in the future. The term sheet must also specify your control over the governance of the company, spelling out how you’ll stay updated on company performance, your participation in the decision-making and governance of the company, and how major decisions will be made. As an angel, you also want a plan for getting your money back once you wish to exit your investment. The term sheet must also cover things like drag-along rights, redemption, and registration rights.
• Step 5 - Raising The Funds: This can be tricky, depending on your situation. If you’re investing solo, it’s straightforward. If you’re part of a syndicate, you’ll need to get other members on board.
• Step 6 - Finalizing The Legal Documents: The term sheet isn’t the final word; it guides the more detailed legal agreement. The final documents get into the nitty-gritty and are typically much longer, addressing each aspect of the deal in specifics.
• Step 7 - Closing The Deal: Lastly, you’ll define a closing date and process. The legal documents get signed, the funds are released, and once everything is finalised, the deal becomes binding.

After your initial investment, you may choose to join follow-on rounds to keep your stake as the company grows and thrives.

How To Start Angel Investing On Grip?

Till now, investments in startups have been available to large venture capitalists and private equity players. These investments were available for a high ticket size that easily ran into a few crores. Moreover, there was no assurance of the success of these companies as there was no way to perform due diligence and background checks on them. 

So, what has Grip done? It has created a new alternative investment option called startup equity.  This lets small investors put their money into startups. By reducing the ticket size for individual investors, Grip has opened high-growth VC-backed startup equity investment opportunities to non-institutional investors. 

• Now, you are not investing crores and can start with a minimum investment of INR 2 lakhs.
• A venture capital firm leads each investment opportunity
• Grip conducts due diligence, finalises the valuation and is responsible for the ongoing corporate governance of the startup
• These include companies that have previously raised leasing or inventory financing from Grip 
• Thus, all these companies have a verified track record in terms of payment and adherence to Grip's credit requirements.
• Investors looking for regulatory comfort can rest assured as the investments are enabled through a SEBI-registered Alternative Investment Fund.
• Investors need to fulfil certain KYC requirements
• A minimum of  INR 2 crore net worth and a commitment to invest INR 25 lakhs over five years is required, which can be easily accomplished.
• Grip maintains complete transparency in its operations

What Are The Benefits Of Angel Investing?

There are several benefits of angel investing. The obvious one is the potential to earn exponentially high returns on investment. When you invest in an early-stage startup, your investment, even in just a few lakhs or crores, can generate exponential amounts of wealth as the startup's value grows with time. Other than this, a few other benefits are as follows:

• Diversifying Your Investments: Angel investing lets you branch out into a high-risk, high-reward type of investment.
• Building Your Network: By teaming up with startups and founders, you get plugged into a whole ecosystem of support and collaboration that's rare in the corporate world. Angel investing opens up connections to founders, other investors, partners, lawyers, and a wide tech network.
• Monetizing Your Expertise: If you have the right skills, founders might ask for your guidance, which can lead to more angel deals or even paid opportunities.
• Learning The Startup Life: You get firsthand insight into the highs and lows of running a startup, gaining lessons that no textbook can teach.
• Staying On Top Of Trends: Working with startups keeps you in the loop on new trends and technologies, giving you a reason to explore new markets and keep your mind sharp.

What Are The Downsides Of Angel Investing?

Like the potential for exponential returns, the biggest downside of angel investing is losing out on your principal investment, earning absolutely no returns! If the company you’ve invested in fails to grow over time, or even worse, goes bankrupt or decides to close down, you simply gain nothing out of such investment.

While there are plenty of upsides, the following are some of the key risks and downsides of angel investing:

• You could lose a lot of money: Most of your investments will likely fail, and when they do, your stake in the company could end up being worth nothing. That's why it’s important only to invest a small part of your overall wealth in angel deals.
• It takes a long time to see returns: As mentioned earlier, angel investing isn’t very liquid, so it might take years before you see any actual cash from your winning investments. This is a long-term game, not a quick path to riches.
• It’s a leap into the unknown: Your decisions are often based more on gut feeling than on solid data. You have very little information to work with at the angel stage, so if you don’t like uncertainty, this might not be the right fit for you.

Conclusion

The Indian startup ecosystem has grown by leaps and bounds in recent times. Individuals are coming up with ideas that can simplify the lives of people.These startups require an opportunity to grow and you as an investor can be a proud equity holder in a startup. Not only are the profits highly rewarding, scaling your investment graph is like a dream come true especially if the startup becomes a unicorn. So, if you are looking to put your money towards the chance of exponential growth, consider doing so with Grip’s Investment plans. 

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Happy Investing!

Disclaimer: This communication does not constitute advice relating to investing or otherwise dealing in securities and is not an offer or solicitation for the purchase or sale of any securities. Grip Invest Technologies Private Limited ("Grip", formerly known as Grip Invest Advisors Private Limited) is not registered with SEBI in any capacity and does not advise, encourage, or discourage its users to invest or not invest in any securities. Grip is solely an execution-only platform and does not guarantee or assure any return on investments made by you in any opportunities sourced by Grip and accepts no liability for consequences of any actions taken based on the information provided. Your investment is solely based on your judgement. Investments in debt securities are subject to risks. Read all the offer-related documents carefully.