Policy Enablers of Angel Investment
Governments can encourage high net worth individuals to invest in startups and take the early risk to ensure angel investing is a recognized asset class. There are a variety of policy approaches.
Padmaja
Ruparel
24 Nov 2020

Job Creation is one of the most critical imperatives for all governments. It not only drives the wheels of the economy, but it also brings in law and order. History has taught us that joblessness and resultant poverty has been the root cause of civil unrest and even terrorism. Startups (and SMEs) are the best job creators, and they need to keep recruiting as they grow their business. These startups are also the hot-bed of innovation that help solve the basic problems that citizens face. Hence, governments around the world should keep a sharp focus on both startups and encouraging entrepreneurship.

The banking system has not been able to fund these startups, since they typically look at the history of the company and startups by definition, do not have a history! The only capital that startups can raise is risk financing. Venture Capital has been one of the best pools of capital to raise money and has helped create not only innovative companies but also high quality talent. Angel Investors are harbingers bringing in early money along with mentoring and advice says a study by Josh Lerner of the Harvard Business School and Antoinette Schoar of the MIT Sloan School of Management.

They reflect, “Startups funded by angel investors are 14% to 23% more likely to survive for the next 1.5 to 3 years and grow their employment by 40% relative to non-angel funded startups. Angel funding affects the subsequent likelihood of a successful exit, raising it by 10% to 17%.”

The most critical factor in the success of new entrepreneurial startup venture is the first funding they receive (usually US$ 500K) from “Business Angels”, who are successful entrepreneurs / business leaders. They not only provide their own personal capital to the new venture but also use their vast experience and business networks to help the company, with both strategy and operations by hand-holding it to success. They are viewed as a very critical element of the entrepreneurial ecosystem and perform a number of different roles:

1, Provide high risk capital: Angel investors tend to play an even bigger role than institutional investors in funding new businesses. They typically have a higher risk appetite as they provide smaller ticket investments at earlier stages in the life of a venture, well before formal venture capital funds show interest in the venture. These investors are often among the first “external” capital providers (i.e. providers not related to the entrepreneurs – meaning their investment provides the business model much needed credibility).

2. Mentor entrepreneurs: Angel investors tend to invest in industries that they are well-versed and are senior professionals or entrepreneurs themselves, therefore able to guide and mentor emerging businesses.

3. Provide access to global networks: As successful entrepreneurs or business leads in their own right, angels provide access to global networks that can help the young entrepreneur to grow their companies quickly and across geographies, including providing easier access to next round funding.

It is critical for governments to encourage high net worth individuals to invest in startups and take the early risk to ensure angel investing is a recognized asset class. The are several policy approaches to that end:

Direct enablers: 

  • matching angel investors’ investment
  • funding operations of angel investor groups
  • Developing cross country bridges to bring angels closer
  • Enabling training programs for angel investors
  • Encourage overseas investors (by easing FDI and remittance of exit processes)

Indirect enablers

  • Reducing or even waiving capital gains tax on exits
  • Enabling easy write-off mechanisms for angels
  • Waiving income tax on startups’ profits for first 5 years

Angel investors are a clearly recognized entity, and several countries around the world have adopted innovative schemes to encourage this asset class.

However, it is imperative for policymakers to ensure that this asset class is enabled and NOT regulated. These "angels" are investing in innovative startups and need to ensure that investments and exits happen very quickly. Speed is genetic to the startup ecosystem.

The Global Business Angel Network (GBAN) has already brought angel investors from around the world to engage on a single platform. It can therefore leverage the best global practices and customize it for individual countries. Well architected policymaking can bring private money in critical but high risk companies to catalyze a country’s wealth and job creation.

Padmaja Ruparel

Co-Founder & President, Indian Angel Network | Indian Angel Network

Padmaja Ruparel is nationally recognized as a key player in the Indian entrepreneurial ecosystem and has… More