Angel investors are basically individuals/small entities making investments in newly established business entities or startups. Their expectation is that the startups will grow at high rate, rewarding rich dividends in future.
Angel investors encourage entrepreneurship by financing small startups at the early stage. At the beginning stage, startups usually find it difficult to obtain funds from traditional sources of finance such as banks, financial institutions, etc. It is apt to say that angel investors are like financial mentors for the beginners. The role of angel investors is thus unique in supporting startups.
Angel investors and Venture Capital Funds: Difference between the two
Usually, angel investors are individuals who make relatively small volume of investment in new ventures. On the other hand, the Venture Capital Funds, who are another category of investors for startups are institutions registered in the form of trusts.
Angel Funds regulation in India
After the budget announcement, the SEBI has amended its Act (Alternative Investment Funds) Regulations, 2012, and accommodated angel investors as a sub category under Category I – Venture Capital Funds called “Angel Funds”. An Angel Fund can be any fund established in India in the form of a trust, company or limited liability partnership which is a privately pooled investment vehicle and is not covered under the SEBI‘s Mutual Funds (MFs) Regulations or Collective Investment Schemes (CIS) Regulations).
Besides, to ensure that the angel investment funds will finance only startups, the following conditions were added for angel fund investment. The angel funds should make investment only in investee companies that:
i. are incorporated in India and are not more than 3 years old; and
ii. have a turnover not exceeding Rs 25 crore; and
iii. are unlisted, and
iv. are not promoted, sponsored or related to an Industrial Group whose group turnover is in excess of Rs. 300 crore, and
v. has no family connection with the investors proposing to invest in the company.
