Angel Funding Framework – Structure

In my attempts to engage in angel financing, I have seen the typical concerns that potential angel investors have. Many of these have to do with the investment parameters, and figuring out how investors can get their money back (or returns) – especially given the inherent immaturity of these businesses in being able to outline an exit potential. Investment then gets limited to businesses where investors perceive a high probability of creating a breakout business. Many other diamonds remain in the rough. I have been thinking of ways of addressing this issue so that seed financing is available to a larger base of startups. This should allow for great businesses to “emerge” rather than being “envisioned”.

To start, I am sharing some thoughts on a potential investment structure that should allow this to happen. There are several other elements to making this successful, besides the investment structure, and I will talk about some of those over next few weeks. In the meanwhile, comments and critiques are welcome on this – both from entrepreneurs and angel investors!

23 Responses to “Angel Funding Framework – Structure”

  1. [...] Context: In around 2009, Alok Mittal and Freeman Murray proposed two different, but interesting models of angel investing. The [...]

  2. [...] needs to change to address typical concerns that potential angel investors have. In my opinion, Alok’s framework which includes convertible debt instruments is a great starting point and could be a win-win. [...]

  3. Vijay Anand says:

    Alok, Great initiative, but I am not sure how this would scale. Here are my thoughts:

    1. As Rajesh Sehgal rightly pointed out and you agreed, this is not the most pleasant of means to raise capital. It almost seems like we are setting up for the ones who wouldnt have the means to raise any other capital, and in which case, this is a no starter to begin with. Success begets success, and the odds are a bit against us here.

    2. Unfortunately the problem with collateral free loans and with trying to structure it, is that, you end up having to frame means to protect the entrepreneur and the investor, and most or less it ends up becoming as complicated and tedious as a bank loan or worse the case of a money lender. I can think of a few ways an entrepreneur can run away with the money here, and a few instances where the investor will become a bit of a pain in the wrong place. In reality, both happens.

    3. I have come across lots of financial institutions doing this model – for much larger sums (Min. 2-5 Crores and above) – ICICI’s Venture arm for one is following it. It seems to work there in some cases – where the entrepreneur is experienced and is capable of handling cash (Isnt managing cash almost THE defining character of an entrepreneur?), but isnt a big hit there either. In most cases, its becoming a case where they are eventually resorting to the loan+convertibles model.

    4. My biggest beef with this: Why glace this so much? Shouldnt we call Angel investing as such and Money Lending, for what it is? This isnt much than a case of formalized money lending. Isnt there a difference between the two?

    As you know I’ve been in the same track of thought about the Angel investment scenario in India. I think 50 “true” angels would lead the way much better than 800 Money lenders glaced, and sugar coated. The sad part unfortunately will be that, none of this will actually help the part where it takes a long time for a startup to scale in India. In some cases only throttle the company and make it focus on shorter milestones. But ofcourse thats altogether a seperate topic by itself.

    Ofcourse all cribbing and no suggestions is bad: In my understanding, I have met a quite a few VCs who also are struggling with constraints, but would love to do early stage. In some cases there is an expression of interest that if an Angel invests (around 100K USD), they wouldnt mind matching it, with an uncommitted follow up round as the startup scales, and with the angel taking the board position initially. Wouldnt that mitigate an angel’s risk significantly and in the long run also build the culture of actual “angel” investing?

    Just my two cents.

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