Angel Investing is a subset of Venture Investing. Herein, the investment is made in the equity of the business at an early stage.
What is angel investing???
Angel Investing is a subset of Venture Investing. Herein, the investment is made in the equity of the business at an early stage.
To further classify, Start-up India defined start-ups as businesses up to 10 years old, less than Rs. 100 Cr. turnover and innovation and technology at core.
Investing DNA
These young businesses have untapped potential market for their innovative offerings, thus seek to raise funds to invest in marketing and product enhancement.
The key here is ability to Innovate. As the businesses grow, their ability to innovate reduces and focus is towards achieving higher efficiencies. Thus, the start-ups have potential to unlock multi fold value as they innovate towards the market & product development vis-à-vis larger businesses that have focus towards market penetration & diversification.
As a result, many of the larger businesses acquire/merge growth stage businesses to offer the innovations to their customers.
Finest examples are of Apple and Jio.
- Apple over the last two decades has acquired over 100 companies (Source). In 2019, Apple acquire one company every two to three weeks and has acquired close to 25 companies in last 6 months alone.
- Over the last 2 years, Jio has acquired 13+ growth stage businesses to complete the offerings of Jio platform
The key to unlocking value in start-ups is innovation & product market fit vis-à-vis profits
Profits???
Many a times we see the value of the company increases multi-fold while the bottom line continues to remain red, this is due to:
- Start-ups focus on exponential growth thus the fund requirement to meet that growth is disproportionately higher than the companies eyeing for a 10-20% growth. The spends on:
- Quantity & Quality of human resource
- Higher working capital requirements
- Higher advertisement and marketing
- Profits are a derivative of financial number which continue to be accounting practices (GAAP) for product first businesses. They do not sufficiently accredit the marketing and product development spends as intangible asset for a technology first company.
Thus, business valuation of start-ups is not determined by only the financial number reported in accordance with GAAP, but takes into consideration with:
- Financial performance post suitable accrediting intellectual capital created
- Non-financial (Qualitative) matrices like
- Increase in LTV
- Decrease in CAC, attrition
- User growth rate
- Product Development
Profits or Valuation
Angel Investing is an asset class amongst many other. The distinction should be considered between business owner & investor.
As investor the valuation matrix should be of importance (which includes financial performance also besides other factors) as it determines the entry and exit price for the investor thus investor’s profit.
While the business is a going concern and with it reaching a point of normal growth the reinvestment requirements would come down and the financial statements would show a new picture altogether. Then it would be matured business with a new approach towards valuation & performance evaluation.
Maturity of Angel Investing
Data suggests, India has ~ 55,000 startups to date with of which ~ 3,200 startups have raised ~$63 Bn in funding in the last five and half years.
Angel investing is a new asset class. Not many have had the opportunity to invest in the asset class and even lesser would have completed the cycle of entry, exit and returns.
This leads to a bias approach towards the return potential.
In terms of returns to investors, Of the 3200 startups that raised funding, 34 are valued at $1B+ each (combined valuation of $115.5 Bn as against total ecosystem funding of ~$63Bn) and 52 are in the queue to enter the club by 2022. Over the last 5 years the investments worth $63Bn are worth ~$200B.
Who should invest as in venture funds??
Angel Investing is still in its nascent stages. It is suggested that venture investing be considered for a 7+ year horizon. It is categorised with high risk and returns and low liquidity investment, thus money invested should not be a part of any crucial investing goals but rather wealth creation.