Shift in Sentiment: Angel Investors Exercise Caution Amid Changing Startup Dynamics
In recent years, angel investors in India have become increasingly cautious when it comes to investing in startups. The focus has shifted from investing in breathtaking concepts to solid business models, as angels prioritize a startup’s execution rather than its potential. This shift in sentiment can be attributed to several factors, including a changing investment landscape and governance lapses at startups.
One angel investor, Reshbha Munjal, decided to shift her investment focus in 2020 after seeing the rise of companies like Flipkart and Ola. She believed there was an opportunity to invest in private markets and ideas that weren’t accessible in public markets. Munjal ventured into private markets and invested in several startups. While many of her investments have done well, a few startups have ceased operations or struggled with fundraising and finding the right product-market fit. As a result, Munjal has become more conservative in her investments.
Zuhaib Khan, another angel investor, was initially attracted to the buzz around Web3 and decided to invest in a few startups in the sector. However, one of the Web3 companies he invested in eventually shut down, leading to a cautious approach in his future investments.
This wariness among angel investors is a significant reversal from a couple of years earlier when startups were a favored investment arena for high net worth individuals (HNIs) and C-level executives. The Indian startup ecosystem experienced a boom in 2021, with a record number of unicorns and multiple rounds of funding. This led to a surge in the number of angel investment firms in India. However, the enthusiasm has waned in recent times, with a reduction in investor participation in the startup sector.
Globally, early-stage startup funding was down by more than 40% in 2023 compared to the previous year. Angel investors who entered the market recently may have over-deployed and their returns largely depend on secondary exits tied to growth rounds. However, late-stage funding plummeted in India in 2023, impacting the returns of angel investors and prompting a reevaluation of investment strategies.
Experienced angels in India are adapting to this new reality by closely scrutinizing deals and focusing on startups with tangible innovation and a clear path to profitability. The shift in angel investors’ concerns has also been prompted by governance lapses at startups, highlighting the need for self-governance in early-stage startups.
Despite the cautious sentiment, industry experts believe that the dormancy among angel investors will likely reverse in the upcoming quarters as the cycle shifts. Multiple seed-stage deals are in the works, and venture capitalists are becoming active again, particularly in sectors like artificial intelligence and climate tech.
In conclusion, angel investors in India have become more cautious in their approach to startup investments, focusing on solid business models and execution rather than potential. This shift in sentiment is driven by several factors, including a changing investment landscape and governance lapses at startups. However, there is cautious optimism for the future, with the expectation that the dormancy among angel investors will reverse as the investment cycle shifts.
