Small investments surge as new wave of angel investors enters startup scene, seeking lucrative returns

While new-age investors make micro-investments of ₹50,000, the majority of angel investor cheques now falls in the range of ₹3 lakh-8 lakh, outpacing the deals typically made by wealthier investors and prominent startup founders, signalling a broader shift towards smaller bets by angel investors.

“We do have a smaller group of investors writing larger cheques of ₹35-50 lakh, often second-generation family office individuals who are getting in early. However, the number of deals at this higher ticket size is comparatively lower," said Padmaja Ruparel, co-founder of Indian Angel Network (IAN), a platform for seed and early-stage investment.

Ruparel added that most investors prefer to put in ₹5-7 lakh because it balances risk at the early stage.

The average ticket size for most angel funds that Mint spoke to is no higher than ₹9 lakh - for IAN it is ₹5-7 lakh, and for platforms like Angellist, it is ₹6-8 lakh.

The practice of writing out cheques as low as ₹50,000 was previously limited to the friends and family of the founders of idea-stage companies. Now, lower ticket sizes are becoming common among a new wave of angel investors that includes younger professionals, business owners from smaller towns, and entrants in the startup ecosystem.

“There has been a gradual shift from a protection mindset to one focused on wealth creation and capital appreciation, alongside increasing appetite for risk," said Manish Goel, founder and managing director of Equentis Wealth Advisory Services Ltd, an investment advisory firm.

Shift from public markets

Wealthier investors such as prominent startup founders and businessmen typically place larger bets of ₹50 lakh and above to diversify their portfolios and reinvest in the ecosystem.

The rise in angel investing has also been fueled by startups coming out with initial public offerings and buying back shares, which allow early investors to exit, creating a new generation of millionaires.

“With companies like Swiggy and Zomato going public, significant wealth has been generated among the higher ranks. The number of people who are investing in startups has increased," Prayank Swaroop, a partner at Accel, which is known for early investments, told Mint.

Over the past two years, the strong performance of the public markets, with top portfolios yielding 25% annualised returns and IPOs adding to the momentum, drew capital away from startup investments.

“Now, with public markets starting to cool off, that capital is once again seeking new avenues, fueling angel cheques," said Syna Dehnugara, who leads the private market expansion for family offices at Trica, a Let’s Venture platform.

Experts said the new-age investors typically form a consortium or a rolled-up entity to pool funds to be invested in startups. Platforms such as Inflection Point Ventures facilitate such investments by offering entry points as low as ₹100,000, which can be further split into three individual cheques, according to its official website.

“Even in cases where consortiums are formed, investments typically involve creating a formal structure, such as an SPV (special purpose vehicle) or a setup where one person leads and others pool their money through them. Promoters rarely accept individual cheques of ₹50,000 or ₹100,000 directly," said Equentis' Goel.

According to an early-stage founder who is raising funds, a growing league of investors is offering cheques ranging from ₹50,000 to ₹100,000, especially directed towards pre-revenue or minimal revenue startups. The founder said early-stage startups in the consumer sector are more likely to raise funds from such groups of investors, each contributing small amounts.

“Growth capital is the cheapest and that for research and development is the most expensive. Consumer startups need growth capital and it's easier to understand those businesses," he told Mint on condition of anonymity.

Risks and challenges

However, experts said small-ticket cheques are highly risky and may lead to overdiversification for first-time investors. Such investments also create operational challenges for startups, which are often ill-equipped to manage numerous small shareholders, so many founders tend to avoid them.

Most angel fund owners said small cheques do more harm than good for both investors and promoters. Aspects such as the lack of awareness of associated risks, low liquidity, non-existent standard governance protections and longer exit horizons in startup investing often harm first-time investors.

"(They) often invest significant portions of their net worth, which is worrying. Angel investing demands a level of sophistication and risk tolerance that micro-cheques can rarely afford," Anirudh A Damani, an angel investor and managing partner at Artha Venture Fund, told Mint.

Startups accepting numerous small cheques face capital crowding and operational difficulties such as managing up to 200 shareholders. For small companies with limited resources, this can divert focus from business operations to shareholder management, added Goel.

The early-stage founder raising funds plans to stay away from smaller cheques.

“Anyone, including an investor, is a new wave of distraction when you are building a business. More investors, more distraction. If you take these types of deals, you also open yourself up to a certain type of investor," he added.

Dhruv Sharma, CEO of AngelList India, said the dilution of investments is unlikely to generate returns, which is the primary reason investors enter the market.

“If you're writing ₹50,000 cheques at a time and you're doing this through a regulated structure, you still need to hit ₹25 lakh over five years. That means these ₹50,000 cheques are spread across 50 investments, leading to overdiversification, not to mention the inevitable write-offs that occur on the losing side," he said. “Beyond a certain entry price, an investment of ₹50,000 simply cannot deliver a meaningful rupee return – even at a high exit multiple – ₹50,000 is not enough cost basis and then there’s dilution."