With the devil in detail, start-ups lose angel investors

Priyanka Pani Mumbai | Updated on March 14, 2019

Funding dived 88% in 2018 due to tricky tax laws, and fast and arbitrary exits

The Indian start-up ecosystem is losing its angels fast. A problematic tax law, arbitrary exits and rise of incubators and accelerators have led to a steep decline in the number and value of angel investments in the world’s fastest-growing major economy.

According to a data collated by start-up research platform Tracxn Labs, angel funding witnessed a sharp 88 per cent decline at $2.52 billion in 2018 against $7.46 billion in the previous year. The number of rounds also declined to 509 (686).

For the uninitiated, angel investor is a private individual who provides or writes the first cheque for any business that is starting up, for an equity stake. The investor also provides the start-ups with the much-needed initial hand-holding and mentorship.

The sudden growth of angel investors in India, the third largest start-up ecosystem in the world, was witnessed post the big-ticket fundings that came into the then start-ups such as Flipkart, Snapdeal and Ola with many angels getting handsome exits.

Angel Tax

Padmaja Ruparel, President & Co-founder of Indian Angel Network, told BusinessLine that the Angel Tax, in its previous avatar [some changes were announced on February 19], did impact the scale of investments last year. She feels that the current reforms are not enough.

“Section 42 of the Companies Act is still a challenge. The ease of doing business needs to be improved. The process of incorporating a start-up needs to be simplified,” she added.

Rehan Yar Khan, Managing Partner, Orios Venture Partners and one of the investors in ride-sharing app Ola, feels that last year was a dampener and that the government urgently needs to bring tax parity between exits in listed and unlisted entities.

“We feel there should be minimum restrictions or regulatory limitations on angel investments,” said Anuj Golecha, co-founder of Venture Catalysts.

However, it is not just the tax law that has been acting as a bugbear. The greed for quick money and faster exits at higher valuation has also led to some bad decision making on the part of the “angels”.

Sanjay Mehta, a serial angel investor and an initial investor in Oyo, is of the view that the angel networks have been selling the story of making quick money. However, these investors quit the network in a hurry after realising that angel investments are an illiquid asset class and the exits are arbitrary.

Published on March 14, 2019

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