How Do Angel Investing Platforms Fund Startups?
Angel investors are most likely the first source of external financing that start-ups raise
Angel investing platforms are a collective of like-minded people who invest in startups and take active part in the Indian startup ecosystem. These platforms provide individual investors access to high-potential startups. As the funding landscape has evolved parallelly to the startup landscape in the country, angel investing has become one of the fastest growing sub-group within the investing landscape.
Angel investors are most likely the first source of external financing that start-ups raise. Since angel investors come in at an early stage of the startup, their involvement is not just limited to providing capital. They take active part in startup development, helping founders through their business/industry expertise and connecting with potential partners as well as future investors.
Angel investing is an important bridge between startups and venture capital. And most angel networks enable this bridge by scouting startups and bringing them to the angel investors. In a country with the number of startups growing exponentially over the years, sourcing and filtering the right startups becomes extremely important and angel networks in India at present have efficiently been able to do it. Many Angel investment firms harness the collective knowledge of its strong investor base. This knowledge pooling allows for strong pre-investment due-diligence and even stronger post investment support to help startups grow - thus ensuring rewarding investments for the investors.
Let's divide the startup finding process into three parts: startup sourcing, startup evaluation and post-investment involvement to get an understanding on how value addition through angel investing platforms helps both, startups and angel investors.
One of the very prominent problems that angel investing platforms solve is providing investors access to good quality startups. Angel investing was, for a long time, something only people with high net worth and established networks within the start-up ecosystem could access. Angel investing platforms however, take up the role of sourcing these start-ups for their investors through building healthy connections with Start-up Incubation Centres, Accelerator Programmes and active conversations with innovation hubs in the country.
The vast and varied investor base also becomes a source of scouting start-ups, owing to different industry expertise of investors, different geographical locations and their individual networks. So a lot of startups that come on to Angel Investing platforms can potentially be through referrals from existing investors.
While there are a lot of budding start-ups, not all of them may be worth doing a complete evaluation at a particular point of time. And thus, Angel investing platforms often implement an initial layer of filtering before they introduce start-ups to their investor base.
At the same time, these platforms operate in a way that they address the investment interest of their member base by closely consulting with them, consistently asking them for their view and feedback regarding specific sectors and startups.
Once a startup has passed through the initial filtering and has garnered substantial interest from investors, an in-depth and detailed study of the startup is conducted. This process is called "due diligence".
As an angel investor, one cannot possibly have in-depth knowledge of all industries, nor can one always have the time to conduct detailed studies on their own for every start-up that they are interested to invest in. Angel investing platforms add immense value here by taking up the responsibility of closely evaluating each start-up through a team of dedicated analysts and industry experts. Thus helping investors make more informed funding decisions. Some standard evaluation metrics include – size of the overall market, competition landscape, the quality of product/offering, legal compliances etc.
Angel investors who are part of these platforms can often choose to volunteer to help in evaluating a start-up so that even other investors can benefit from their expertise. Angel investing platforms also leverage the diverse investor base to conduct efficient and detailed due-diligence.
In most cases, angel investing intersects the funding story of any startup at a very early stage. Angel investing platforms play a crucial role post funding by taking active part in the start-ups further growth and also fostering a relationship between investors and startups.
The angel investing platforms take up the responsibility of keeping a check on the start-ups performance by getting regular updates and conveying them to investors.
Assisting startup growth
At times start-ups may need help in specific areas such as marketing, product feedback, supply chain optimization, strategic guidance, industry connects etc. to name a few. Angel investors are most often willing to offer their help in these areas, with angel investing platforms facilitating this exchange in a more structured manner by connecting start-ups to angel investors that might be best positioned to help them in specific areas of concern.
Next round of funding
Angel investing platforms take active part in helping their portfolio start-ups raise the next round of funding for further development and growth. They may or may not do follow-on rounds for all their portfolio start-ups but they help most of them by providing connections to VCs or other investors. Even for the investors, angel investing platforms taking active part to generate exit opportunities for them becomes a valuable offering.
After having read to this point, one may wonder if there is a vast difference in how a VC invests in start-ups versus how an angel investing platform invests in a startup. But the key takeaway here is that angel investing platforms are positioned to harness the power of the collective by consolidating capital and the knowledge and expertise of individual Angel investors to help startups grow.