Angel tax going away will boost funding next year: IAN's Padmaja Ruparel
India’s burgeoning angel investment ecosystem has lately been the focus of policymakers, chiefly around the issue of the so-called angel tax. Padmaja Ruparel, co-founder of Indian Angel Network (IAN), who, among others, was involved in negotiations with the government on problems related to the angel tax, tells TechCircle that the issue has finally been laid to rest.
Ruparel, who is also founding partner of IAN Fund, now expects heightened activity in early-stage investments.
One of the most active angel investing networks in the country, IAN is now gearing up for action. The 12-year-old platform, which also launched the Rs 350 crore IAN Fund last year, has already invested in over 130 startups including FabAlley, Druva, and WebEngage. While the network continues with its mandate to back early-stage startups at the seed and pre-seed stages, the sector-agnostic IAN Fund will complement those investments by taking a selection of companies to the next level. Edited excerpts from an interview on how policy decisions will impact the funding environment as well as what the IAN Fund has set out to do for startups looking for growth capital.
How did the issue of angel tax impact early-stage investment? Are the clarifications enough?
The ecosystem has slowed down, one of the big reasons being the angel tax issue. It has been simplified with the notification from the Central Board of Direct Taxes (CBDT). Hopefully, with the new (financial) year, we will see an uplift.
Those who have received notices will have to complete the process but with the new notification we have worked on with the government, things should clean up. I personally feel that the activity on the angel side will increase.
It also stems from the fact that the government has done a little bit more than what we had asked for. For example, startups now include companies with a revenue of Rs 100 crore, as compared to the earlier definition which considered companies with revenues of Rs 25 crore. The notification has excluded NRIs (non-resident Indians), corporates and venture capitalists so that a startup can actually raise more money than it could earlier. Those are good things that have happened.
How has the angel ecosystem evolved in terms of deal flow over the past two years?
Last year we got a little under 10,000 deals and this year we are tracking at the same level. The deal flow has not decreased but the investment has decreased a bit. If you are going to get a notice for your portfolio companies, it is discouraging. Secondly, a lot of companies are moving overseas because of this and there is a limit to how much you can invest overseas. A lot of investors have told us that they want to invest only in Indian companies because they don’t want the headache of regulation. Angel tax going away should change the mood in the next financial year.
Since you started your own fund, how have things changed?
If you look at any other fund, it will do 20 to 25 deals led by the partners, whatever they can get access to or understand. Our deployment strategy is very different.
We divide our companies into three buckets. In bucket one are those companies which are raising up to Rs 6 crore. These deals will go through the angel process, which we have been running for over a decade. Once the angels put in 80%, the fund puts in the remaining 20%.
Then there are companies that need the next level money and there is a gap in the market for the same. For bucket-two companies, the fund evaluates it for an infusion of the next round, and does its own due diligence to take a call on whether we would like to take the company forward. But because it is our company and in the interest of corporate governance, we would not set the valuation and commercials. We invite another investor like a Sequoia or a Matrix saying we like this deal, would you like to look at it.
These third-party funds do their own due diligence. For the company, it is a good opportunity as it already has 50% of the round from the IAN Fund and the IAN Fund uses its network to rope in other investors.
Is it difficult to get multiple investors on the table?
We have a problem of plenty. We do have a problem where we have competing term-sheets. Because we have been co-investing and managing 400 to 500 investors for a decade we are able to get two people to co-invest.
There are also bucket-three deals, where the companies are raising more than Rs 6 crore which the IAN fund leads typically, like any other fund. Once we have decided, we open 20% of the round to the angels so that the companies are able to access the mentoring and the market they bring to the table. The fund is a very unique model, and the proposition is complementary and not conflicted.
How many deals have you closed from the fund and what is the ticket size? What is the sector focus?
So far we have done 32 deals. The ticket size depends on the bucket of the company. We are sector-agnostic but we have put a focus on agriculture, healthcare, healthtech, which includes biotech, medical devices, cybersecurity, water, and irrigation. We will keep an eye out for this.
For the last two to three years, our average ticket size has been between Rs 2 crore and Rs 3 crore and that has not changed dramatically. There are companies that have raised Rs 5-6 crore and there are those that have raised Rs 50-75 lakh. So we average it out.
Apart from angel tax, what are the other regulatory issues that startups are facing now?
Angel tax as an issue has been laid to rest. You cannot step out of the process if you have received income tax notices. We would like to thank DPIIT (Department for Promotion of Industry and Internal Trade) and its secretary Ramesh Abhishek who brought CBDT on the table.
However, another regulatory issue is Section 42 of the Companies Act where the private placement norms kick in. It states that private companies cannot solicit more than 200 investors to subscribe for a private placement issuance.
When a company has to raise Rs 2-3 crore, it is a risky proposition. It is at a stage where it is just a punt. The company has to talk to at least twice the number of investors than needed. As an angel, you don’t want to put in the money unless you have the bare-bones understanding of the sector the company is in.
Section 42 in these aspects is limiting. Because the company is restricted to a much smaller pot of investors. This is where angel groups like us also have a problem.
How does this affect the angel groups?
When an angel group like ours reaches out to investors, we can reach out to say, 450. But if you say only send it to 200, which 200 investors do I send it to? As it plays out, a company needing Rs 4 crore will only get Rs 2 crore. If the company gets lesser money than it needs, those who have committed will back out reasoning that where will the rest of the money come from. It will be money which will not get followed up.
I am a little tired of these negotiations -- the last six years we have been negotiating on the angel tax issue.
Are there any other regulatory concerns?
We are also asking for a waiver of the 20% required to be paid by the companies when they receive demand notices from the CBDT.
Startups are cash-strapped. We have asked for a provision for startups registered with DPIIT to be waived from paying the 20% ahead of the appeal. Let the process go through so that we are not intervening in the process. They can finally take whatever has been agreed between the company and the tax authorities. I have not seen a notification on that and I have spoken to some entrepreneurs on that and they have been handled better.
Under Section 56 of the Income Tax Act, there can be a provision to waive the 20%, so that there is a little bit of relaxation to the company which is already cash-strapped.
E-commerce saw a wave where a lot of venture capital and angel money came in the last decade. E-commerce has continued to be a hyper-active sector. What are the others sectors where you think most of the money is going into?
I believe consumer goods, especially brands, agriculture-tech, sanitation, insurance, health-tech, including bio-tech, medical devices, different propositions for farmers, and genetics are some of the areas where we see some level of activity happening.