Introduction

While you're envisioning the launch of your startup in India's rich entrepreneurial ecosystem, the thought of getting early funding might seem overwhelming. You've perhaps saved some money or considered availing loans. But once you start scaling your startup, you'll need flexible financing. This is where angel investors come in - key players who provide money and experience, and they are people who can help you navigate initial challenges. This blog will discuss who angel investors are, their characteristics, how they work, and why they are essential for the startup narrative.

Who Are Angel Investors?

Angel investors are wealthy individuals who utilise their wealth to provide early-stage funding to startups like yours in exchange for an ownership stake. Even though they fund your business, angel investors are not banks or traditional lenders, so they will not expect repayments and interest. Instead, they are betting that an idea will provide a high return on investment and exit with a sale, acquisition, or IPO. In India, angel investors tend to come from successful business backgrounds, and they realise the viability of a new concept, even when existing investors would never put dollars into the idea due to high risk.

Examples of Business Angels

So, who are angel investors? They are usually seasoned investment veterans – former CEO's, entrepreneurs or others who have successfully built and exited their own companies. To illustrate, take the following individuals:

• Kunal Shah, the founder of a leading fintech company, invests in consumer technology and e-commerce companies.

• Anupam Mittal, founder of a matchmaking business, invests in health tech and edtech sectors.

• Rajan Anandan, a former technology executive, invests in AI and sustainability ventures.

These investment individuals (business angels) are not institutional funds, but individuals committed to investing in their ventures.

Traits of Angel Investors

What special qualities or characteristics do angel investors possess? Here are some key traits to consider:

Industry Knowledge: They often have more profound knowledge in verticals such as technology, finance, and/or manufacturing through years of experience.

Risk Tolerance: They know the startup failure rate is as high as 90%, but they still accept risk for a potentially high return.

Mentoring Approach: Many are hands-on in helping you develop your product or a go-to-market strategy.

Lower Amount of Investment: Unlike venture capitalists, angel investors write smaller checks, typically individual investments ranging from a few lakhs to several crores, making them an excellent fit for the seed stage.

How Do Angel Investments Work?

If understood, the angel investing process can allow you to prepare yourself effectively. Which is precisely what takes place:

Step 1: Sourcing Investors

Angel investors can be identified within your distant circle, from other circles (e.g., websites), or by using elevator pitches or the competition. It is critical to network with experienced entrepreneurs at events in either your industry or the investor community.

Step 2: Due Diligence

Once the investor expresses interest, they will start the due diligence (thoroughly examining your business model, your team, the market opportunity, and the financial forecast) to determine whether your startup is viable beyond the near term.

Step 3: Investment Agreement

You will work with your investor to create a term sheet and shareholders' agreement establishing the investment amount, equity share, and any possible governance rights. The term sheet offers details about the investment.

Step 4: To Complete the Transaction

After reviewing and accepting the contract, the parties sign the appropriate legal documents and exchange equity and money. This is the finalisation stage of a transaction, which can take weeks to months, depending on the complexity of the partnership.

Indian Angel Funding Context

In India, individual angel investors may provide direct funding to startups. However, pooled vehicles known as ‘Angel Funds’ are under the regulation of SEBI's Alternative Investment Funds (AIF) Category I framework. Beginning in 2025, SEBI requires that an accredited investor in angel funds have a net worth that exceeds ₹5 crore or have an annual income of over ₹2 crore.

The minimum investment for angel funds registered with SEBI is ₹25 lakh per startup (with a maximum limit of ₹10 crore). Funds solicited after September 10, 2025, must consist only of accredited investors, while current funds may have until September 2026 to comply.

Benefits of Angel Investors for your Startup

Working with angel investors has several benefits:

• Startup Capital: They provide capital when banks are unwilling, at your startup or growth stage.

• Functional Networks: Their networks of suppliers, customers, or other funders can amplify your speed.

• Industry Knowledge: You gain from their wisdom, decreasing your mistakes and improving your story.

• Increased Credibility: Their investment increases your brand reputation, thus attracting talent and partners.

• Flexible Capital: They can reinvest if your start-up is progressing.

Risks and Challenges

While angel investing offers prospects, you must consider:

• High Risk: Startups often fail, risking capital loss and potential equity.

• Time-consuming due Diligence: Limited historical examples might inhibit your assessments.

• Control: Some investors may take equity or control of your business.

• Tax consequences: Capital gains on exit apply, thus you may want to consult your professionals.

Why Angel Investors are Important for You

As you start your business, angel investors can help create a lifeline by combining finance with experience. Regardless of your industry, tech, retail, or sustainability, they can transform your idea into a living business. Nevertheless, prepare a capital raise pitch, ask for investor resources, engage, and minimise risk to develop, execute, and sustainably scale your startup.