Angel investors are basically individuals making investments in newly established business entities or startups. Their expectation is that the startups will grow at high rate, rewarding rich dividends in future.
Angel investors encourage entrepreneurship by financing small startups at the early stage. At the beginning stage, start ups usually find it difficult to obtain funds from traditional sources of finance such as banks, financial institutions, etc. It is apt to say that angel investors are like financial mentors for the beginners.
The role of angel investors is thus unique in supporting startups.
Angel investors and Venture Capital Funds: Difference between the two
Usually, angel investors are individuals who make relatively small volume of investment in new ventures. On the other hand, the Venture Capital Funds, who are another category of investors for start ups are institutions registered in the form of trusts.
The government in India has launched a formal arrangement to make investment in startups. This step by recognizing angel investors as a category of investors by providing registration and regulation under the tag ‘Angel Funds’ was done in the budget 2013-14. The budget has placed angel investors under the regulatory control of SEBI and given them the status of Category I AIF venture capital funds. while placing the regulation, Finance Minister has made the following statement.
“Angel investors bring both experience and capital to new ventures. SEBI will prescribe requirements for angel investor pools by which they can be recognized as Category I AIF venture capital funds.”
After the budget announcement, the SEBI has amended its Act (Alternative Investment Funds) Regulations, 2012, and accommodated angel investors as a sub category under Category I – Venture Capital Funds called “Angel Funds”. Such funds shall raise money from angel investors and make investments in start-ups/early stage companies.
(AIF is an entity that pools the money into one arrangement. It is any fund established in India in the form of a trust, company or limited liability partnership which is a privately pooled investment vehicle and is not covered under the SEBI‘s Mutual Funds (MFs) Regulations or Collective Investment Schemes (CIS) Regulations).
Besides, to ensure that the angel investment funds will finance only startups, the following conditions were added for angel fund investment. The angel funds should make investment only in investee companies that:
i. are incorporated in India and are not more than 3 years old; and
ii. have a turnover not exceeding Rs 25 crore; and
iii. are unlisted, and
iv. are not promoted, sponsored or related to an Industrial Group whose group turnover is in excess of Rs. 300 crore, and
v. has no family connection with the investors proposing to invest in the company.
Further, it is proposed that investment in an investee company by an angel fund to be not less than Rs. 50 lakhs and not more than Rs. 5 crore. It is also proposed that the investment in a company shall be required to be at least for a period of 3 years. Also, investment shall not be allowed in associates.