Maharashtra National Law

University, Aurangabad

CORPORATE FINANCE Optional I

Research Project

On

ANGEL FUNDS

Submitted By:

NIYATI KISHORE

2018/BALLB/23(B.A. L.L.B. 4th year, VIII semester)

On

April, 2022

Under the guidance of

Mr. Amit Savale

Faculty of Law

TABLE OF CONTENT

Acknowledgement 03
Declaration 04
Objective of the Study 05

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 Methodology 05
Scope and Limitations 05
Introduction 06
Angel Network 07
Angel and Angel Networks in India 09
Analysis of angel investment activity levels in India 11
Conclusion 13

Acknowledgement

A project is a joint endeavour which is to be accomplished with utmost compassion, diligence

and with support of all. Gratitude is a noble response of one’s soul to kindness or help
generously rendered by another and its acknowledgement is the duty and joy. I am
overwhelmed in all humbleness and gratefulness to acknowledge from the bottom of my
heart to all those who have helped me to put these ideas, well above the level of simplicity
and into something concrete effectively and moreover on time.

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This project would not have been completed without combined effort of my revered Faculty-
in-charge of the subject whose support and guidance was the driving force to successfully
complete this project. I express my heartfelt gratitude to them. Thanks are also due to my
parents, family, siblings, my dear friends and all those who helped me in this project in any
way. Last but not the least I would like to express my sincere gratitude to our teacher for
providing us with such a golden opportunity to showcase our talents. It was truly an
endeavour which enabled me to embark on a journey which redefined my intelligentsia,
induced my mind to discover the intricacies involved.

-Niyati Kishore

- VIIIth Semester

-Roll No - 18/BALLB/23

Declaration

I hereby declare that the work reported in the B.A.LL.B (Hons.) Project entitled “ANGEL
FUNDS” submitted at Maharashtra National Law University, Aurangabad is an authentic
record of my work carried out under the supervision of faculty of Law of Corporate Finance.
I have not submitted this work elsewhere for any other degree or diploma. I am fully
responsible for the contents of my Project Report.

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Niyati Kishore

VIIIth Semester

Roll No. 18/BALLB/23

Objective of the Study

The Research on Angel Funds as part of Law of Corporate Finance holds a great significance
as it is quite a relevant topic to research on with respect to India. With the help of the research
on angel funds, it will give us an insight to the topic. Researching on this topic would provide
us with the minute intricacies of the provision and would benefit the society as the it helps
understand the provision little better and considering the situation and the circumstances of
the law the study becomes all the more important.

Methodology

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The research shall be a doctrinal research although there are certain facts but they are viewed
strictly from the prisms of historical perspective. The research is heavily relied upon the-
judicial precedents, Reports of certain committees and the landmark verdicts of the judiciary
and other reliable sources of information from the World Wide Web.

Scope and Limitations

The scope of the research is to examine the Angel funds followed by the changes recently
made in the law. The main purpose is to review the challenges and examine or identify the
loopholes of the said topic so that it could be rectified and something could be done for the
betterment of the society at large and in development of the scope of the subject matter.

INTRODUCTION

In the 80s and 90s a number of country level studies surveyed the investment activities of
angels in their respective countries. The country level studies typically describe the profile of
the angels and their investment styles and preferences. Their methodological limitations
aside, they do not provide a useful understanding of the characteristics of the markets or
investment performance outcomes in those markets. The second category of work includes
more recent studies which have focussed instead on the investment processes of angels and
tried to develop a connection between them and the portfolio outcomes (See for example Kerr
et al., 2014; Hellmann et al., 2013). A third strand of the literature examines the emergence of

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mechanisms to address sources of inefficiencies in the angel investment market such as high
search, and information and transaction costs. The angel investment market comprises two
types of investors, namely angels who invest as individuals (referred to hereafter as “lone
wolf” – we borrow this term from May, 2002) and angels who invest as a group or networks
(referred to hereafter as “angel networks” – Roach, 2010; Payne & Macarty, 2002). Angel
networks are believed to be a lowcost solution to match founders and investors. While angel
investors have been active in India for a long period, data on their investment activities have
been reported only during the past fifteen years or so. Available data from Venture
Intelligence (VI hereafter),2 a commercial provider of data on venture capital, private equity,
and angel funding activity in India, show that as of June 2016, 855 investments have been
made in 756 enterprises.

ANGEL NETWORKS

Angel networks vary in terms of the way they are constituted and the way they function,
aspects that I discuss later in this note. Angel networks help individual angels, who formally
acquire membership in these networks, by augmenting their business networks. They also
enable their members to participate in transactions even if they have relatively smaller sums
to invest individually or if they operate from geographically remote locations (Mason &
Harrison, 2002). Further, such angels allocate a part of their investible funds for follow-on
investment (Van Osnabrugge & Robinson, 2000). In that sense angel networks are more

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similar to VC funds in the way they carry out their investment activity. For example, Tech
Coast Angels, an association of three regional networks, resembles VC funds “with respect to
their investment style” (Payne & Macarty, 2002).

Angel networks are believed to lead to improved deal flow as also increase the funding
amount to a level that it can address the growing gap between individual angels and
institutional venture capitalists (VCs). Angel networks bring efficiencies to the deal sourcing
and investment evaluation processes which are normally considered to be “notoriously
inefficient”. Since angel groups interact with counterparts in different geographies, they
should be able to invest in geographies that are further away from where they are
headquartered and thereby generate better deal flows (Roach, 2010).

Angel networks use several routes for investing such as creating a fund out of their pooled
capital, or investing directly into the funded enterprises in their individual capacity (using the
network for merely sourcing and evaluating deals) and investing into an enterprise that has
been created specifically for funding a chosen enterprise. These different approaches indicate
that although angel networks function in a structured manner, they allow themselves enough
flexibility when it comes to channelling their funds. The investment processes followed by
angels is in some ways similar to that of institutional VC investors (Van Osnabrugge &
Robinson, 2000).

Yet, individual angels vary a lot in terms of their financial sophistication and entrepreneurial
background (Prowse, 1998). In general, practitioners as well as academic researchers have
pointed out that in comparison to VC funds, angel investors invest in smaller and earlier stage
ventures, work with minimal due diligence although the process they follow is similar to that
of VCs, prefer to invest in ventures that are located in proximity to the investor’s
geographical area of business, use simple contracts or even none at all occasionally, care less
about exit, and are satisfied with lower rates of return. Possibly due to the differences in their
investment styles angels report lower risk adjusted rates of return that angel investors realised
in comparison to VC investors.

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 ANGELS AND ANGEL NETWORKS IN INDIA

My analysis of angel investment activity in India is based on data provided by VI, a public
provider of data on venture capital, private equity and angel investing industries in India. The
analysis includes data up to June 2016, the data that was available at that time of undertaking
this project. Of the various data items that are available on the VI database we focus on the
number of rounds of funding, number of start-ups funded, follow-on funding from angels as
well as VCs and exits. I do not analyse the rupee amounts of funding or valuations or returns
because of the challenge I anticipate in obtaining reliable data relating to these data variables.

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Angel investment (of the kind defined in Shane, 2009) has been in vogue in India for a fairly
long time. Both lone wolf investors and angel investors have been active in India. Angel
investors have partly filled the gap that existed in the capital market until the development of
the VC and private equity industries. Based on the manner in which various angel networks
are organised I define an angel network as a formal association of individual angels and
corporate investors who are bound by a formal structured arrangement governing the
sourcing of investment opportunities, evaluating investment opportunities, engaging with
portfolio enterprises, and exiting from investments at the appropriate time.

These activities are usually managed by a secretariat. Several angel networks, each of them
constituted differently and bound by different shared objectives, have been established in the
past ten years or so. Since there is no formal registration requirement or regulatory oversight
governing angel networks, a single source of information on the angel networks in business is
not available. In the dataset provided by VI I find 15 angel investment groups that correspond
to our definition of an angel investment network.3 Indian Angel Network (IAN, hereafter),
Mumbai Angels, Chennai Angels, Hyderabad Angels, Calcutta Angels, (BITS) Spark Angels,
Chandigarh Angels, Native Angel Network and CIO Angel Network appear to be among the
more active networks, measured in terms of the number of investments made by them. Online
networks are an even more recent phenomenon.

The ones that were set up recently like LetsVenture and Tracxn have been able to generate far
more interest among investors and entrepreneurs alike. In the older type of networks, the
intermediation between the entrepreneur and investors is managed by a process with a
significant human engagement whereas in the online networks a larger part of the
intermediation is conducted online. The jury is still out on whether one type of network will
dominate the market, or both will co-exist by discovering their respective sweet spots. The
IAN’s organisation and its way of functioning illustrate the working of a typical offline angel
network in India. The IAN is an interesting case because of the sheer amount of
documentation available on their website. Further, the IAN and the other networks appear to
be similar in terms of their business processes and the manner in and extent to which they
engage with the entrepreneurial community and the ecosystem, although they may differ in
their scale of activity.

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 ANALYSIS OF ANGEL INVESTMENT ACTIVITY LEVELS IN INDIA

The number of investment rounds provided by angel investors has been growing over the
years. The number of transactions increased from 25 per year between 2000 and 2008 and
then at the rate of 60 per year between 2009 and 2011 and 90 per year from 2012 onwards.
The growth in 2015 and 2016 has been particularly remarkable. The portfolio of all angel
investments put together shows a high degree of concentration. Angel investors seem to have
concentrated their investments in certain sectors.

Online services accounted for 37% of all deals done while information technology (IT)
products accounted for 18%, mobile value-added services for 13%, food and food delivery

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for 5% and the rest of the deals were accounted for by the 11 other sectors. If one were to
take into account that some of the online services would be part of the larger mobile based
businesses, exposure to the mobile centric sector accounts for half of the number of
investments. The data shows that during the period of our analysis the sectoral pattern has not
varied significantly year on year as seen from a cross-tabulation of year and sector. (Details
not presented in this paper.) That however does not mean that sectoral preferences of
investors are not likely to vary at all. Taken in blocks of years the data suggests some shifts in
investor preferences.

Sectoral differences may also be due to the preference for certain industries at certain points
in time. Thus, BPO and Analytics were a preferred sector in the early years of the new
millennium when lone wolf angels were actively investing in those businesses. In the USA
considerations such as familiarity with the founders and the proximity of the location of the
enterprise could explain the investment preferences of angels as much as the attractiveness of
the sector (Wong et al., 2009; Lerner et al., 2015). More than two thirds of all deals were
located in the South (39.7%) and the West (28.7%) as per the region-wise breakup in Table 3
while the North accounted for 26.2%, the East for 1.1%, and international investments for
4.3%. Similarly, analysis of data on the city wise distribution of angel funded enterprises
(available with the author, but not tabulated here) shows that Bangalore accounted for 27.5%
of the investments, followed by the National Capital Region of Delhi comprising Delhi,
Gurugram and Noida accounting for 24.9%, and Mumbai for 20.1%. Pune, the city with the
fourth largest number of deals, accounted for a mere 5%.

In contrast to the Indian experience, in the USA angel investments tended to be more
distributed geographically (Wong et al., 2009). The angel portfolio also witnessed
considerable post investment activity. The VI data shows that 76 enterprises raised two or
more rounds of financing from angels, 237 enterprises went on to raise one or more rounds of
VC funding and angel investors exited from 62 enterprises during the period of this analysis.
Around 18% of enterprises funded by angels raised follow-on funding from the same angels
who funded them first or other angels while 28% of those enterprises raised funding from
VCs. In the absence of data on the rates of return achieved on these investments these can be
seen as an indication or a measure of the progress achieved by the enterprises invested in by
the angels.

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Given how VCs use staged financing to increase their funding commitment to enterprises, as
new information unravels about their performance (Sahlman, 1990), the number of rounds of
VC financing indicates the durability of an enterprise in its early stage. This is so because
institutional investors who provide funding at the early stage of an enterprise would not
continue to pour in capital if they did not believe in the quality of the management team and
the prospects for realising an adequate risk-adjusted rate of return on the given investment.

The number of enterprises that raised one, two and three or more rounds of financing
respectively. Eleven percent of angel funded enterprises went on to raise institutional VC
funding. This must be viewed in the light of the fact that 55% of the enterprises were funded
less than three years prior to the date of this analysis. Typically, a venture may require one to
three years of development before it might qualify for VC funding. Angels exited from 50 out
of the 745 enterprises (6.70% of the enterprises) that they had funded during the period of
this study, as per data from VI.

CONCLUSION

In recent years there has been a rapid growth in the number of deals funded by angel
investors. However, given the need and potential for the growth of entrepreneurship in India,
growth in informal equity funding has to keep pace. That brings up many interesting and
relevant questions. What are the benefits for investors and entrepreneurs in funding through
angel networks? What would be the more effective and efficient form of networking – the
traditional model or the online model? Should networks be regulated? To what extent should
they be regulated? Are there any changes needed in the regulatory regime that govern the
entry and exit of angel investors in an enterprise? As angel networks evolve questions of
public policy are likely to emerge about creating framework conditions that will encourage

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either or both sources of angel funding. The process of investment management followed by
angel investors in terms of due diligence, valuation, and post investment engagement needs to
be understood better. The link between the processes that are followed at present and their
impact on investment outcome also need to be understood. Such an understanding will be
useful for all the stakeholders concerned: Investors will be able to improve their approach
while entrepreneurs will have a better appreciation of how to engage with angel investors
more meaningfully, and policy planners will be able to evolve a regime that is more
supportive of angel investing.

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