Angel Investing in India in the 21st Century

Introduction

Several interesting developments have taken place in India in the 21st century in the angel investing space which are a subject of study for researchers in this field. The money being attracted in the angel investing space is only a small fraction of the total wealth growth of the High Net Worth Individuals (HNIs). This trend is not only being observed in India but globally as well. However, something slightly different is also seen in the case of the Indian HNIs. Some younger entrepreneurs who started their businesses and later on sold them at high valuations are seen to be more adventurous and they have allocated a larger portion of their assets to riskier avenues like angel investments. By taking stakes in these companies through angel investments, they also want to guide, advise and mentor these companies. Except for fixed income investments like bank fixed deposits, all other asset classes including angel investments, have been delivering high returns. One more salient feature is that the deployment of wealth by the Indian HNIs is not confined to Indian shores only but it is also being deployed abroad.

Purpose of the Study

In the angel investment space in India, the supply side has been increasing because of the growth in the HNI wealth. On the demand side, the demand for that capital is no longer confined to India. Indians are now investing globally in different asset classes, e.g., stocks, commodities, real estate, hedge funds. In 2016, according to a report in the Round Table on Angel Investments held at IIM Bengaluru, the Indian Angel Networks investment abroad was 4.1% of their total investments.

Investments are primarily driven by two factors: 1) Entrepreneurial action and 2) Policy environment, which should favour investment activity. A huge demographic dividend and the growing spirit of entrepreneurship have given rise to an increase in entrepreneurial action. However, most of the angel capital is flowing to the North, West, and South of the country and angel investment in the Eastern part is low.

The angel investors or the early-age investors are all informed individuals and don\'t need to be shielded. Before 2008, there was very limited regulation on the angel investing space. Post 2008, some regulation has been introduced. The regulations introduced in 2012 have approached angel and venture capital as one category.

Method of the Study

Our main method for doing this research was to review the literature on angel investing in twenty-first-century India. The literature research will assist in better understanding angel investors\' role in the start-up ecosystem. The keyword \"Angel Investing in India\" was searched throughout a number of journals and databases, including Springer, Scopus, Science Digest, and SAGE, in order to compile all of the literature in this field.

Literature Review

The contribution angel investors have made to the growth of the Indian start-up ecosystem in the twenty-first century has been highlighted in peer-reviewed studies. According to M. Mustafa (2021), inadequate finance or lack of access to finance has the potential to exclude many future entrepreneurs if they do not already have personal wealth. Start-ups in their early stages may bump into various obstacles, including the financial gap, called the \'valley of death\', which limits their ability to innovate and scale. Angel investors help the firms survive this valley of death by providing capital and mentoring the entrepreneurs to help them succeed.

Angel investor finance is becoming a more popular choice for starting a business in India as a result of venture capitalists\' and private equity firms\' growing emphasis on big deals and supporting companies later on rather than from the start. The problems that individual angel investors face gave rise to angel networks to overcome search and information costs.

Results & Analysis

The reforms of the 1990s were the harbinger of change in the attitudes of Indians towards the start-up ecosystem. The reforms increased the average income of the Indian population and the growth of the Indian economy accelerated. Globalisation encouraged the Indian population to innovate. India\'s economy has emerged as one of the world\'s top five in the ten years between 2014 and 2024. This impressive trajectory is also seen in the notable improvement in the country\'s Ease of Doing Business (EoDB) ranking, which rose from 142 in 2014 to 63 in 2019.

The following factors offer opportunities for the emergence of new start-ups and consequent angel investments in India:

• Huge Demographic Dividend: More than 65% of India\'s population is in the productive age group of 18 to 35 years and this represents the most productive portion of the population. This huge chunk of population is filled with the entrepreneurial spirit giving avenues for angel investment in their start-ups.
• Startups Drawing Significant Investments: Large sums of money are being invested in Indian startups by both Indian corporate investors and institutional investors from abroad.
• Risk Taking Mindset of People: Winds of change blowing in the economy have encouraged more people to seek new growth avenues like startups and angel investments.
• Government schemes have encouraged the entrepreneurial spirit: Startup India and Standup India provide tax and compliance breaks while cutting through the red tape. Through MUDRA yojana, startups get collateral-free loans from banks, and under SETU, a corpus of Rs.1000 crores has been created to support opportunities.
• Corporates and Business Houses Investments: Big corporates and business houses have made angel investments in startups and thus encouraged entrepreneurs.
• Entrepreneurship has increased in India: Technological developments have led to the emergence of several start-ups, making India rank third consistently on the number of new start-ups coming up every year.

A compound annual growth rate (CAGR) of 12% is projected for the Indian angel investment sector between 2022 and 2025. Angel investments are expected to increase from $3.2 billion in 2022 to $7 billion in total by 2025. By 2025, there will probably be over 4,500 active angel investors in India. One of the main causes of these possible funding opportunities is the outstanding achievement of India\'s leading unicorns.

In the Finance Act, 2012, the Angel Tax (i.e. Section 56(2)(VII)(B) of the Income Tax Act, 1961) was introduced which sought to tax the excess premium received by a company on the issue of shares. In 2016, as a measure to boost startups, these norms were relaxed exempting startups registered with the Department of Industrial Policy and Promotion (DIPP) from such Angel tax. Budget 2024 has proposed to abolish the angel tax for all categories of investors, which will provide a shot in the arm to the Indian start-up ecosystem.

Conclusion

India\'s current improved rank of 63 in the world in Ease of Doing Business has given impetus to the emerging start-ups in the economy. Angel investment has become the most preferred choice of a start-up for seeking capital in the 21st century, due to its collateral-free nature along with India\'s huge demographic dividend filled with an entrepreneurial spirit. The vast market existing in India for new products lures angel investors towards start-ups introducing new-generation innovative products. Venture funding firms have shifted their attention to more established businesses, allowing angel investors more room to meet startups\' funding needs. The abolition of the angel tax being a provision of the Finance Bill, 2024 will further boost the Indian startup ecosystem and act as an impetus for higher inflows of capital in the startups/economy.