- The recent rule relaxation for Angel Funds has seen regulator SEBI turning a guardian angel to the nascent startup eco-system in India. SEBI recently amended its Alternative Investment Fund (AIF) regulations to give angel investors an easier passage.
What is it?
- Angel investors are a class of well-to-do investors, usually experienced industry folk who take equity stakes in startups. They take very early-stage businesses under their wing. Typically, institutional investors such as venture capital funds or private equity funds do not like to commit capital to tiny businesses. Nor do they like to bet their shirt on firms that are yet to prove themselves in the marketplace. Angel investors literally step in where others fear to tread.
- These funds that pool money from many individual ‘angels’ so that they can invest sizeable amounts into start-ups and enjoy better negotiating power while doing so. Angel Funds in India, are regulated by SEBI, which lumps them with venture capital funds, SME funds, social impact funds and sundry other funds, under the umbrella regulations for Alternative Investment Funds (AIFs).
- SEBI’s rule relaxation has untangled many complex rules that constrained Angel Funds and their investors. Angel Funds have been allowed to source money from as many as 200 investors, instead of 49. They can invest lower amounts (₹25 lakh) in each startup, with shorter lock-ins (one year, instead of three). Investments have been allowed in firms incorporated in the last five years (up from three years). This gives founders a long runway to seek funding before the clock runs out.
Why is it important?
- Every year, angels in the US invest about $25 billion in nearly 50,000 startups; VC funds invest about the same amount in 5,000 start-ups or so. In India, barely 1,000 angel investors invest $20 million per year. Of the 268 registered AIFs as of November 15, only five are Angel Funds. Clearly, the original idea failed to take off and angels cited the long list of rules on their investment choices as a constraining factor.
- SEBI-appointed Narayana Murthy committee suggested that these rules be relaxed in its report early this year. SEBI has borrowed mainly from this report to free up Angel Funds. But not all changes have altruistic motives. A few were just to ensure that it gels well with other rules. For example, the original regulation limiting the number of investors in the fund to below 50 was in line with the Companies Act, 1956. The increase of this limit to 200 aligns it with the new Companies Act, 2013.
Why should I care?
- If you are a wannabe entrepreneur, the new changes may make your capital raising just a little easier. As more wealthy people in India take an interest in startup investments, the over dependence on foreign investors will ease. And given SEBI’s high standards for individual angels — minimum net worth of ₹2 crore, prior experience in early-stage investments or serial entrepreneurship, or a ten-year stint in industry — founders need not worry about inexperienced investors. If you are a HNI with funds to spare, the changes, though not magical, are interesting.
- Angel funds may not turn attractive overnight, but SEBI’s changes will help them gain popularity.