Angel funds and Venture Capital Funds invest in businesses at a very early stage when the majority of the world is not aware of them. These funds pool money from investors and invest in promising startups.
The startups they invest in are typically looking to innovate and bring out new solutions in the industry they are operating in. Compared to their listed counterparts, these businesses are more scalable and also more risky. Today, in India there are roughly 1.35L startups as per Startup India reports.
When these startups go through their unique journey of making losses in their early phase to making profits in their expansion phase, that is where the majority of the wealth gets created. E.g. InfoEdge (an early investor in Zomato) had already made more than 500x returns before Zomato got listed, and Nazara Technology had already provided 100x returns to its early-stage investors before going public.
What is an Angel / Venture Capital Fund?
An angel/ venture capital fund is a type of an investment fund that invests in early stage start up companies that are poised to disrupt the sector they are operating in.
Regulations
In the usual scenario, Angel/ Venture Capital funds are part of Category 1 of the Alternate Investment Funds in India (AIF). These AIFs are SEBI regulated.
Minimum Ticket Size
The Minimum ticket size in AIFs is Rs 1 crore. However, for funds that invest in angel stage, the ticket size can be 25 lakhs. Also, while investing in such funds investors generally do not have to commit entire capital upfront. The capital is roughly to be paid in 2 to 4 years depending upon the investment period of the fund.
Growth of Angel / Venture Capital Funds and Start- Up Ecosystem
Overall, the strength of India’s VC ecosystem has driven real economic value for the country—VC investments have played a pivotal role in bolstering the start-up ecosystem in India—only behind the US and China globally—and have created more than 3 million jobs directly or indirectly over the past eight years.
Despite the news of economic slowdown and words like startup winter being mentioned often, the start-up ecosystem in India remains strong—among the top three now globally, with a total of more than 100 companies achieving ‘unicorn’ status. The country has already surpassed previous predictions of achieving 100 Unicorns by 2025. (Below is an image from Harvard Business Review
Benefits
Uncorrelated Portfolio:
VC funds create a portfolio of startups that function independently based on their performance and fundamentals. As the companies are unlisted, they are not correlated to the wider equity and debt market and are not volatile in nature.
Professional Management:
An Angel Fund Manager / VC fund manager has significant experience , great connections within the industry, better deal flow and ability to add great value to the start up he is investing in. This makes the portfolio more resilient and poised for higher alpha
Risk and Reward:
A good fund will be able to reduce the risk through appropriate measures such as mile based financing while still generating significant upside by letting the winners run for a long time horizon.
Capital to be paid in tranches:
While the minimum capital contribution is 25 lakhs / 1 crore. The capital is required to be paid in tranches. This allows investors the flexibility and time to manage his /her cash flows better.