Why Global Angel Investors Don't Want to Miss India's Startup Bus As India emerges as the third largest ecosystem in the world, we are seeing active participation by angel investors from outside India in funding rounds of Indian startups

Most startup stories start with the capital offered by families and friends in the form of debt or as a gift. When the startup reaches a certain level, mostly when it finds the right product-market fit, angel investors become the most crucial and organized channel of financing.

In India, the concept of angel investments took off with the success stories of Flipkart, Paytm, Ola, InMobi, among others. These paved the way for many more investors to understand the benefits of early-stage investments.

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Today, as India emerges as the third largest ecosystem in the world, we are seeing active participation by angel investors from outside India in funding rounds of Indian startups.

For instance, recently fintech gamified startup Fello raised $4 million in a funding round led by US-based Courtside Ventures, along with participation from Entrepreneur First, Ycombinator, Kube Venture and Upsparks. It also saw angel investors Charlie Songhurst, Dafeng and Alan Rutledge participate in this round, along with CRED's Kunal Shah and Groww's Lalit Keshre. In October, we saw neo-banking platform Vance raising a $5.8 million seed round with participation from Rutledge.

These international angel investors are primarily investing in sectors broadly performing well in the current Indian startup ecosystem, that is, legacy sectors such as healthcare and financial services as well as new-economy sectors such as SaaS, EV, agritech, deeptech amongst others.

Capitalizing on India's growth

The ever-growing Indian startup ecosystem has increased the confidence of angels across the globe. They are ready to take a bet on Indian entrepreneurs very early in their journeys. "Plus, the availability of a large and diverse talent pool, the increasing number of successful exits, and the potential for high returns on investments. There are many reasons why investors outside India are taking an interest. To add a cherry to the cake, the increasing number of unicorns in India has also attracted the attention of global investors, who are keen to capitalize on the potential of the Indian market," said Parth Garg, founder CEO, Vance.

Also, the startup ecosystem's inception in the West started in the early 90s and today it is very evolved. Although angel investments still happen, it has mostly matured. "In India however, we are still at the cusp of the growing startup ecosystem with enough depth (product offerings) and breadth (competition and allied products). The investors bring with them the necessary experience and skill sets that they have developed with prior start-ups and the ability to provide dual synergies through investment and experience in the specific sectors," said Ankur Bansal, co-founder and executive director, BlackSoil.

"Experienced angel investors who have been around the block for a while understand that the next wave of early-stage investing opportunity is unlikely to be in their neighborhood and are always evaluating global markets," said Vaibhav Domkundwar, founder and CEO, Better VC.

Notably, many missed China's burgeoning startup cycle and they don't want to repeat the same mistake in India as it was clear that India would follow suit with the data-connected smartphone population growing by the day. "So, I believe, the experienced angel investors invested in India and are likely to continue to do so based on a view that India will produce iconic companies this decade as talent and capital are both now addressed at scale," added Domkundwar.

Angel Investors typically get an exit from startups when the startups raise their Series B and further rounds of funding. "The funding boom in India began when VCs started pumping money into Indian startups when they themselves had some sort of visibility of a potential exit. The turning point for VCs in this aspect was driven by Walmart's acquisition of Flipkart in 2018. From this period onwards, the Indian startup ecosystem began witnessing an inflow of foreign capital from both angel and institutional investors alike," said Bansal.

Indian economy in a sweet spot

Today, while the global scenario is grim, the Indian economy seems to be in a fairly bright spot. Has this heightened the interest of these investors?

"I doubt it. The interest was, is and will be driven by a more macro view around how well India is positioned to produce the next generation of global innovators," said Domkundwar.

Garg disagrees. "The strong performance of the Indian markets along with the government's efforts to promote the startup ecosystem through initiatives such as Startup India, and Make in India programs has helped create a more conducive environment for foreign investors," he said.

Also, while the startup ecosystem in the US has matured, China and Europe are facing global issues. This has made angels from these countries look at India's startup ecosystem as the next hub of innovation and growth. "Although not completely insulated, India has witnessed a fair amount of macro-economic stability, which has further accentuated growth across sectors in the startup ecosystem. Despite the funding slowdown, 2022 emerged as the year with the highest seed funding between 2019 and 2022," said Bansal.

Another key factor is that the early-stage startup ecosystem continued to remain vibrant in 2022 on the back of a significant rise in deal sizes and the number of deals secured. Investment in early-stage is today a safer choice since most late/growth-stage startups are burning cash and profits are nowhere in the picture. According to Entrackr, around 596 early-stage startups raised funds in H1 2022 as compared to the late/growth stage, which accounts only for 226 deals.

"While the growth and late-stage startups were marred by the funding winter during the year, seed-stage startups raised $2 Bn in funding, the highest since 2014, across more than 750 deals. Investors believe that the capital efficiency of Indian early-stage startups has helped them remain attractive to both domestic and foreign investors. As a result, post 2020, the seed funding range expanded. Despite the funding slowdown, 2022 emerged as the year with the highest seed funding between 2019 and 2022," said Roma Priya, founder, Burgeon Law.

Well-structured regulations

Aside from sectors such as real estate, agriculture, defence, foreign investment is freely permitted in almost all sectors via the automatic route, say experts. Under the automatic route, foreign investors do not require any approval from the RBI or the Government for investments made in Indian companies. This has further encouraged global angels to look at India as a safe investment haven.

Experts believe that well-structured regulations are in place, which has helped build trust for foreign investors in India. Mainly there are laws such as the FEMA (Foreign Exchange Management Act), FDI policy, RBI's policies, and even taxation laws for investors. "The Reserve Bank of India announced an amendment in 2016 that allows FVCI to invest in ten industries (such as biotechnology, IT, the dairy and poultry industries, and infrastructure) whose shares are not listed without needing RBI approval. These industries include biotechnology, IT, the dairy and poultry industries, and infrastructure. Additionally, FVCI will not need RBI clearance in order to invest in stock, equity-linked securities, or debt securities issued by an Indian startup, regardless of the industry in which the start-up operates. Additionally, FVCI does not require permission to purchase venture capital fund units. FVCI, however, will need to register with the SEBI," said Roma Priya.

India's startup industry is growing like never before and nobody wants to miss the Indian pie. Therefore, we will only see many more global angels betting on Indian entrepreneurs, especially from Tier II and beyond.