This news may dampen your spirit a little, especially if you are rejoicing over recent strong indications that VC funding is finally seeing revival in the Indian startup ecosystem. But again, my duty is to bring out complete & comprehensive picture, which essentially means that I should not leave any uncomfortable stories.
So the uncomfortable truth about the current funding boom is that angel investors in India may not be steering at a very rosy future. This is what surveys and studies done by LetsVenture and Nasscom have found out.
A study by LetsVenture, a dedicated platform for angel investors, revealed that nearly half of the angel investors across India see only 25% of their portfolio companies raising follow-on-funding (i.e. Pre-series A & Series A funds). The study further revealed that more than 50% of angel investors have not seen profitable exits.
These numbers may appear even more bleak if we compare it with China. In China, nearly 50% of startups with angel investments (as compared to roughly 30% in India) are able to secure series A or follow-up funding. Chinese investors also fare better in securing profitable exits than Indian counterparts.
Another study done by Nasscom depicts a similarly worrisome picture. It claims that even as numbers of startups have increased over the years, number of angel investors have decreased quite drastically.
As a result, the Nasscom report further claimed, that the seed funding saw a drop of 21% in 2018 as compared to 50% last year.
Experts argue that the recently introduced ‘angel tax’ may have caused this significant drop in the angel investment. For people who are not aware about ‘angel tax’ then it is a hefty 30.9% tax imposed on startups that receive equity infusion in the excess of fair value.
Although the government has given some concessions on angel tax, this hasn’t really helped in restoring the confidence among investors. As such, there are limited fundraising avenues available for the startups and ‘angle tax’ may be making all the more difficult for Indian startup ecosystem to attract new investors
However, keeping apart hindrance posed by angle tax and worrisome trends indicated by Nasscom & LetsVenture, the future of angel investors is still safe. My optimism stems from the sheer resilience of the Indian startup ecosystem. Although not as large as the Chinese or U.S. startup ecosystem, Indian startup ecosystem is still resilient enough to keep attracting new set of wealthy investors in its flock.
Secondly, the number of Indian billionaires, millionaires as well as HNIs continue to grow unabatedly, which certainly lends hope that new group of angel investors will frequently keep turning up for promising startups. A recent report by Credit Suisse claims that India created a whopping 7,300 more millionaires during the 12 months to mid-2018. This takes total number of dollar-millionaires to 3.43 lakh in India, the report added.
With India being home to so many millionaires and billionaires, we have all the reasons to believe that the glass is still half-full and not half empty.
Let’s all hope that this optimism is indeed validated over the years. After all, angel investors bring the much needed seed funding into the startup ecosystem and hence play a critical role in maintaining the overall health of the ecosystem. They bring the funds when startups are either still in idea stage or don’t really boast the market tractions.
More importantly, at this early stage most VCs refuse to take the leap of faith, which makes the role of the angel investors all the more important.