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Exploring the Contrasts Between Angel Investors and Venture Capitalists

Contributed by Boniface Pascalraj who leads the incubation program at SSN iFound.

Fundraising is one of the crucial aspects of a startup. While there are various avenues to raise funds, startup founders understand Angel investors and Venture capitalists interchangeably. However, there are some key differences between the two that are important to understand.

Here is a brief about the difference between angel investors and venture capitalists.

Angel investment and venture capital are both forms of private equity funding for startups and small businesses, but there are some key differences between them.

Angel Investment

Angel investors are typically wealthy individuals who invest their own money as Angel investments in startups, often in exchange for equity. They may also provide mentorship and connections to the founders.

The average ticket size for angel investment in India can vary widely, but it is typically in the range of INR 10 lakhs to INR 2 crores (approximately USD 14,000 to USD 280,000). It is important to note that the exact ticket size can depend on various factors, such as the stage of the startup, its industry, and the experience of the entrepreneur.

However, it is common for angel investors to make smaller investments, such as INR 5 lakhs to INR 10 lakhs (approximately USD 7,000 to USD 14,000), especially in the early stages of a startup. This allows them to diversify their portfolio and mitigate the risk of loss.

Overall, the ticket size of angel investment in India has increased in recent years due to the growing startup ecosystem, and it is expected to continue to rise in the coming years.

Angel investment networks like The Chennai Angels, We Founder Circle, Mumbai Angels, and Hyderabad Angels facilitate angel investments by acting as intermediaries between individual angel investors and startups. These networks evaluate the applications of startups and select those that they believe are promising to present to potential investors. If investors express interest in investing, the networks conduct due diligence before the investment is made. After the due diligence is completed, individual investors invest their own money in the startups, with the networks taking a small management fee on the funding amount.

Venture Capital (VC)

Venture capital firms, on the other hand, pool money from institutional investors and high-net-worth individuals and invest that capital into startups. These firms are often more focused on high-growth potential companies and are typically seeking a higher return on investment compared to angel investors.

The average ticket size of venture capital (VC) investment in India can vary widely depending on the stage of the startup and its industry, but it is typically in the range of INR 5 crores (approx. USD 670,000) to INR 20 crores (approx. USD 1.3 million).

For early-stage startups, the average ticket size is usually lower, in the range of INR 2 crores (approx. USD 267,732) to INR 5 crores (approx. USD 670,000). As the startups mature and reach later stages, the average ticket size for VC investment tends to increase, reaching INR 10 crores to INR 50 crores (approx. USD 1.3 million to USD 6.7 million) for growth-stage startups.

These numbers are just averages and can vary greatly based on the specific circumstances of each startup and the preferences of the VC firms. Some VC firms may also choose to make smaller investments, while others may opt for larger investments.

Some of the venture capital firms are Sequoia Capital, Accel, Nexus Venture Partners, Kalaari Capital, Matrix Partners India, and so on.

Traction Expected

The amount of traction that angel investors and venture capitalists expect from businesses can vary depending on a variety of variables, including the sector in which the startup operates, its stage of growth, and the investment size being considered. Yet, in general, both venture capitalists and angel investors prefer firms that have shown some traction or proof of concept.

Angel investors may be more open to startups that have little to no traction but have potential based on other factors, such as the experience of the founding team or the potential of the market opportunity, as they are frequently willing to invest in startups at an earlier stage than venture capitalists. Despite this, the majority of angel investors continue to seek out firms that show at least some early indications of success, such as early customer or user acceptance, early revenue or sales, or promising early partnerships or collaborations.

There are some angel networks that expect traction in the range of INR 60 lakhs ARR to INR One Crore (approx. USD 80,259 to USD 133,766) ARR. There are also some angel networks that invest in promising startups that have demonstrated lesser, but reasonable traction. However, the percentage of equity that these angels take may be higher.

On the other side, venture capitalists frequently seek out firms that have already shown strong traction and expansion prospects. These can include firms with a clear plan for growing their business to reach a bigger market, have a proven business model and revenue stream, and have attained early product-market fit. Additionally, venture capitalists frequently concentrate on businesses in sectors with strong growth prospects, like technology or healthcare.

Both angel investors and venture capitalists are engaged in the Indian startup environment, and there are numerous examples of successful firms that have received money from both. In general, Indian startups are required to have a well-defined growth and scaling strategy with a focus on long-term profitability and sustainability. Yet, depending on the investor and the sector, different levels of traction may be expected from businesses. While some investors are more prepared to take a chance on earlier-stage firms, others prefer to invest in companies that have already shown strong traction and development potential.

Examples of Angel funding in India

These are some examples of startups in India that have received angel funding, along with information on the magnitude of the investment and the amount invested

1. DUNZO: A group of investors led by Google, Blume Ventures, and Aspada contributed $3.1 million in angel capital to the hyperlocal delivery service Dunzo. The company raised the money in 2017, and since then, it has raised money in additional rounds.

2. SWIGGY: A group of investors led by SAIF Partners, Accel Partners, and Norwest Venture Partners contributed $1.25 million in angel investing to the food delivery service Swiggy. After raising the money in 2015, the business has since raised more money, including a $1 billion fundraising round in 2018.

3. OYO Rooms: A group of investors led by Lightspeed Venture Partners, Sequoia Capital, and Greenoaks Capital provided $24 million in angel capital to OYO Rooms, a hotel aggregator platform. The company received the money in 2014, and since then, it has grown to be one of India’s top hospitality businesses, with a valuation of over $10 billion.

4. Razorpay: A group of investors led by Matrix Partners and Y Combinator contributed $2.5 million in angel capital to the payment gateway and processing business Razorpay. The company raised the money in 2015, and since then, it has raised more rounds of funding, including one for $160 million in 2021.

Examples of VC funding in India

Here are some instances of venture capitalists funding startups in India:

1. Byju’s: Byju’s, an education technology firm with offices in Bengaluru, raised $500 million in a funding round that was co-led by Silver Lake and included participation from current investors Tiger Global, General Atlantic, and Owl Ventures. After the fundraising round, the company’s worth was $10.8 billion.

2. Swiggy: Naspers, Tencent, Hillhouse Capital, and Wellington Management Company joined Naspers in a $1 billion fundraising round for the Indian food delivery service Swiggy. Following the funding round, the company was given a $3.3 billion valuation.

3. Flipkart: In a capital round headed by GIC, Canada Pension Plan Investment Board, SoftBank Vision Fund, and Walmart, Flipkart raised $3.6 billion. After the fundraising round, the company’s worth was $37.6 billion.

4. Ola: In a funding round led by SoftBank Group, Tencent Holdings, and Ratan Tata’s investment company, the Indian ride-hailing startup raised $2 billion. After the fundraising round, the company was valued at $4.3 billion.

5. Zomato: Indian food delivery and restaurant discovery platform Zomato raised $660 million in a funding round led by Temasek, Baillie Gifford, and Ant Financial. The company was valued at $3.9 billion after the funding round.

Based on the unique conditions of each business and the preferences of the VC firms, the ticket size and total amount invested in these businesses differed greatly. Yet, it is important to keep in mind that compared to angel investments, venture capital investments often entail higher sums of money.

In summary, angel investors are individual investors while venture capital firms are institutional investors and venture capital investment usually involves larger amounts of money and a higher expectation of return.

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