Venture capitalists may pull out their chequebooks and accept unrealistic valuations. But along with quick-and-easy money, startup founders are turning to angels and recognizing that their diligence, while investing, is an asset. As an investment opportunity, a well-chosen early-stage venture can cause serious wealth generation.

Let’s get into the subject and let’s understand what Angel Investing is and why startup founders are looking up to it.

Who is an Angel Investor?

A person who invests their money in a startup company, unlike institutional venture capitalists who invest other people’s money, is an Angel Investor. Angels can be classified into 2 groups:

1. Affiliated
2. Non-Affiliated

Affiliated Angel Investor: Someone, who has some kind of contact with you or your business but isn’t necessarily associated with or familiar with you, is an affiliated angel investor.

Here are some individuals who fit in the category of Affiliated Angel Investor:

1. Professionals - These include professional providers of the services used like doctors, dentists, lawyers and accountants.
2. Business Associates - These are people you come in contact with during the traditional course of your day.

These can be further classified as:

• Suppliers/Vendors - Investment from them may not come in cash but in the form of better payment terms or cheaper prices.
• Customers - These are good contacts if they use your product or service to make or sell their own goods.
• Employees - Some of the key employees might be sitting on unused equity that would make excellent collateral for a business loan. 
• Competitors - If a competitor is doing business in another part of the country and doesn’t infringe on your territory, they may not only share capital but information as well.

Non-Affiliated Angel Investor: Someone who has no reference to either you or your business is known as a non-affiliated angel investor. 

This category includes:

1. Professionals
2. Middle Managers
3. Entrepreneurs
4. Advertising
5. Business Brokers
6. Telemarketing
7. Networking
8. Intermediaries

Why Angel Investing?

Angels are better fitted to seed investments because the amounts they deploy are small, hence forcing the founders to be wise about their outflows. Too much funding is a thing and it results in hurried decisions and extravagance that startups can ill afford. Angels are a counterbalance to this and increase the business' chances of success in the long run.

Angels don’t invest unless they have a genuine belief in the business idea. They spend a substantial amount of time knowing and evaluating startup founders. They look for a genuine passion and commitment rather than merely an investment opportunity. Angel Investing backs great ideas and fearless founders, thus, defining what future startups will look like.

Other than money, benefits obtained from Angel Investors are:

1. Contacts with venture capitalists
2. Contacts with strategic partners
3. Advice and counsel
4. Credibility
5. Contact potential customers
6. Contact with potential employees
7. Contact with lawyers, banks and accountants
8. Knowledge of the marketplace and strategies of similar companies

What are the most important things for Angel Investors?

1. Quality, passion, commitment and integrity of founders
2. The market opportunity being addressed and the potential for the company to expand
3. A clear blueprint of the business plan
4. Interesting technology or intellectual property
5. An appropriate valuation
6. The viability of raising additional rounds of financing if progress is made

How does an Angel Investor finance?

Angels often invest in the company through a convertible note, if not through straight equity deals. A convertible note is a sort of short-term debt that converts into equity, typically in conjunction with a future financing round. The investor would be loaning money to a start-up and rather than a return in the form of principal plus interest, they would receive equity within the company.

What are the common terms for convertible note seed financings?

1. Unsecured or secured on the assets of the company: This is almost always unsecured.
2. Interest rate and payment: The interest is usually accrued and not paid currently.
3. Discount rate: This is the rate that the investors enjoy taking the early risk in the company.
4. Valuation cap: This is the maximum valuation of the company where the note can be converted into the next round of financing.

The scenario in India:

India has been flush with venture capital funds and there’s a need to make sure the startup basics are right without which you can’t build a sustainable business. Indian startups understood the necessity for such support from angels early and have actively sought such investments. From an Angel’s point of view, such investments typically result in a lasting relationship with founders.

While the temporary economic speed bumps in recent times may have given pause to some, the very fact is that startup funding in India is on a roll. In fact, in the first six months of 2019, startups are estimated to have received a record of $3.9 billion, according to Venture Intelligence. This was a jump of 44.4% over the same period in 2018.

Given India’s vibrant startup scene and the mind-boggling array of ideas across sectors we are seeing, there hasn’t been a better time for angel investors. Startups are seeking them out as much as angel investors are seeking the right opportunities. It's a match made in start-up heaven.