Angel investment platforms in the country want to play a bigger role as investors in startups, and they are taking the venture capital route to make that happen. In other words, angel investors convert venture capital by setting up venture capital funds and writing larger checks.
Angel investment platforms usually consist of individuals who come together with the goal of putting money into startups at an early stage during the inception or pre-incorporation stages. Check sizes for angel investors are much smaller than those of traditional venture capital firms.
Generally, angel investment platforms invest between Rs 1 crore and Rs 10 crore; The ideal spot is in the range of Rs 2 crore to Rs 4 crore. Investments through these platforms can be in lakhs.
But now, in a marked deviation from their traditional operations, angel investment platforms are creating their own venture capital funds with larger check sizes. Investors believe this gives them a greater say in the startups’ operations and allows them to participate in their long-term growth story.
Some of the angel investment platforms that launched venture capital funds are Indian Angel Network (Ian), Inflection Point Ventures (IPV) and Uh! projects.
A large portion of the venture capital fund’s money comes from outside investors. Existing investors on the angel platform may also put their money into the fund.
IAN was one of the first angel investment platforms that started a venture capital fund. The fund closed at Rs 375 crore in 2019.
“It makes sense for Angel Network to launch a VC fund because it allows them to write bigger checks for startups that require this (money) for their next stage of growth,” says Padmaja Ruparel, co-founder of IAN.
Gurugram-based IPV platform, which has been investing in startups since 2018, launched a venture capital fund this year called Physis Capital, with a target size of $50 million.
“The need to launch a VC fund like Physis arose because IPV wanted to support some of the potential winners from its existing portfolio and lead and participate in significant growth cycles that are Series A and above,” says Anchor Mittal, Partner at Physis Capital.
Amit Kumar, partner, ah! Ventures, an angel investment platform, says, “Founders will not prefer a smaller check size when their startups get a higher valuation.”
Uh! Ventures launched a venture capital fund this year with a target size of Rs 100 crore.
Generally, when a startup chooses the next round of funding, its angel investors are given the option to exit. Even if they continue to invest, investors may not have much say in important matters regarding the startup.
But a venture capital fund gives investment platforms better leverage in the startup and equal status with other venture capital firms backing the startup. They may also have equal rights as shareholders in the startup company.
Another advantage that investment platforms derive from a venture capital fund is a less crowded cap schedule.
The cap table shows the number of entities that have ownership in a particular company. While the angel investment platform is made up of a group of individual investors, the venture capital fund is a single entity.
According to Amit, founders don’t like a crowded rooftop table, especially when they’re keen on an institutional funding round. A busy max schedule could mean sending performance reports to many people and also having their queries answered.
The co-founder of another angel investment platform says, on condition of anonymity, “The founders are tired of seeing more than 20 names on their cap table and would rather deal with one entity.”
Participate in the growth story
Venture capital funds provide investors with the opportunity to support winners from their early days as well as participate in stage one and stage deals. This helps investment platforms to stay longer with startups with profitable potential.
Even big funds like Sequoia and Accel backed early stage companies through programs like Surge and Atom, respectively.
Ankur of Physis Capital, the venture capital fund for IPV, says, “Physis will pave the way (for IPV) to participate more in selected success stories. The capital from Physis will help us invest more aggressively in larger rounds and give us room to lead certain strategic growth rounds in Potential unicorn startups.
Amit than ah! Ventures says, “Now we can become co-investors when the startup goes to the next round of funding and also help it get more capital.”
Through venture capital funds, investors are also able to participate in deals not only within the angel investment network, but outside it as well.
Trends seen so far
Venture capital funds for angel investment platforms have been able to attract promotions from startups of the best quality – in terms of value proposition, products and services.
For example, Physis Capital has started receiving parcels and proposals for evaluation and the first closing of Rs 100 crore is expected to be announced in the next two months.
Some angel investment platforms that have launched venture capital funds allow investors to become limited partners in the funds.
On the regulatory front, there has been an alert from market regulator SEBI to angel investment platforms to create a more structured setup of venture capital so that it can get a better overview of operations.
In the current funding winter, late-stage funding appears to have dried up and the focus has shifted to early-stage investing. Even the largest venture capital funds are showing interest in this area. This is where angel investment platforms can play an important role, given their expertise in early-stage investing, and can be treated on par with larger, more established venture capital funds.