Government Circular on Angel Tax : Core Issue continues to be unresolved

DIPP (Department of Industrial Policy and Promotion) has published a recent circular tweaking definitions of a startup and angel investors and has defined a process for exemption under Section 56 of Income Tax Act Which startup can approach DIPP for exemption Under Section 56? ●      The company has to be recognised by DIPP as a startup ●      Paid up share capital, should not exceed INR 10 Crores ●      The investor/ proposed investor fulfills either of the following criteria:    ○  Average Income of INR 25 Lakhs for preceding 3 financial years    ○  Networth of INR 2 crores ●      Report from a merchant banker specifying the fair market value of shares ●     The approval will come from an Inter Ministerial Board comprising    ○  Additional Secretary, Department of Industrial Policy and Promotion, Convener    ○   Representative of Ministry of Corporate Affairs, Member    ○   Representative of Ministry of Electronics and Information Technology, Member    ○   Representative of Department of Biotechnology, Member    ○   Representative of Department of Science & Technology, Member    ○   Representative of Central Board of Direct Taxes, Member    ○   Representative of Reserve Bank of India, Member    ○   Representative of Securities and Exchange Board of India, Member Our Take While this circular has increased the total paid up capital and has put a clearer definition around who will qualify as an investor, the key issue is still unresolved of the approval from the Inter Ministerial Board for exemption from “Angel Tax” or Section 56 of Income Tax Act. The process of getting a fair value certification from a Merchant Banker will only add to the compliance costs and time for the startups, who are already juggling with many too many variables in trying to grow their startup. In an environment where investors are taking calls to back startups, which are inherently risky investments with a high mortality rate, this approval process will continue to act as a dampener for the angel investment ecosystem.

Mumbai Angels Network: Strides Taken In 2017

As the financial year draws to a close, we would like to take this opportunity to highlight how our network has grown over the past 12 months. 1.Mumbai Angels Network is now in 6 cities with 250+ investors. This year our network increased its footprint across the country with the addition of 2 new chapters: Hyderabad and Pune. We have come together for the first of its kind partnership, with Calcutta Angels, largest network in the east. 2.We are the first network to launch MANTs, a digital currency to harness, measure and reward member engagement. In a short span of 6 months, the MANTs engagement index has shot up from 300 to 1200! 3.Our curation and ability to bring unique deals to investors is now the industry benchmark. We invested across diverse ventures ranging from anti counterfeiting and drones analytics to liquid biopsy and supercapacitors based batteries. 4.We invested INR 15 crores in 12 high potential, high growth startups this year. The smallest investment we made was INR 48 lacs, the highest was INR 3.5 crores. 75 members invested in these companies. 5.Our deal closure process has become an industry best practice with the closure timelines being cut down by one third. 6.We now have a 119 companies strong portfolio, with 30 exits till date. This accounts for about 25% companies exited, comparable to global standards for angel investing. 7.This year alone we had 3 exits, with an average of 1.5X return multiple for our investors. A total of 66 members invested INR 4 crores in these companies. 4 more exits are in active closure, you should see the press release soon. 8.Our start-up showcases are known for their format, time adherence and overall TV show quality! Most members mention our format as the highlight of their investing experience. 9.We conducted several networking and educational events across our chapters. Our Angel Investing Masterclass is recognized as a marquee platform. 10.We continue to engage with the government on all policy related matters that impact investing in startups. Our network today is on all tables wherever policy in startup investing is being discussed, representing your interests. We will soon be announcing several new wealth creation initiatives, building an even stronger platform for you to access the best startups, co-invest with like minded savvy investors, manage your investments and learn the craft of angel investing! Thank you for your continued support in growing our community and for playing a critical role in evolving India’s startup ecosystem Warm Regards Nandini Mansinghka Chairperson Mumbai Angels Network

Essential Start-up Tips

“Ideas are easy. Implementation is hard”. This phrase is true for modern-day start-ups as they juggle various facets of a challenging business environment. From ideas to execution, the strength of a start-up lies in paying attention to finer details. While there are hundreds of start-ups that have made their mark today, there are a million others who have, sadly, bitten the dust. What separates a successful start-up from the not-so-ones. Here are some of pearls of wisdom that you can follow when it comes to launching your next venture.

1)      Failing to plan = Planning to fail

You’ve got to put together a solid business plan. Addressing the problem statement, target customers, revenue model, cashflow management, and performance matrix, aligned very well with the time-bound business objectives can get you further along in your journey.

2)      The early bird catches the worm

Launch your business quickly and address the problem statement right away. Waiting for a perfect product may drain too much time and resources. Instead, extract the right amount of value from your product and present it to your customers. Market timing is critical here.

3)      Teamwork is the secret sauce to success

Regardless of which business you are into, putting together a kick-ass team is mandatory. From founders to customer service, from sales to domain experts, these are your backbone. Getting them right is critical to your business. Putting aside personal interests especially among the founders for the larger goals and open communication between team members can pave the way for a favorable outcome.

4)      Know thy customer and know them well

Not every customer is going to be ideal for your business. Understanding the effort involved in acquiring and then servicing a customer is important. You cannot have too many customers paying you too little. This leads to a higher acquisition and servicing cost to the company. Going after small customers who pay within your comfort zone is far better than large customers who may be bad paymasters.

5)      Stay lean

Accomplish more with less. Whether your well-funded or bootstrapped, services or product company, as a start-up, learn to curb unnecessary expenses. Let go of that fancy office space, or that extra spend on parties and outings. Avoid those expensive conferences or events, instead stick to a budget and keep a tight check on your spend.

6)      In God we trust, everything else needs to be measured

Performance metrics across all business functions are sacrosanct. Prioritize strategic and tactical goals for founders and team members. Ensure that you evaluate your company’s performance against your short, medium and long-term goals, make adjustments as necessary and optimize your resources to meet those set targets.

Budget Wishlist for the Start-Up Sector

By Mr. Ishan Singh, 

          CEO & MD RevStart ; 

          Member, Mumbai Angels Network

As an entrepreneur turned angel investor, who runs RevStart, where we offer co-working, incubation and acceleration services, I meet startups and entrepreneurs daily. Startups in India have varied needs that need to be addressed by the government with an open mind & financial eye.

Mr. Modi had ignited a billion minds with Start-up India and Make in India. With large number of unemployed youth, this is the need of the hour. The current government has done a lot to help the startup ecosystem, however the Modi government's mantra of minimum government and maximum governance seems contradictory when one looks at the Angel tax or the recent news where the Income Tax department has asked ecommerce sites to reclassify discounts as capital expenditure.

For any budding entrepreneur, access to capital is the most critical factor to success. The government needs to have a broad-based program to ease the flow of equity capital and credit to entrepreneurs and start-ups.

A good idea would be to look at incentives being given in other countries – most programs involve grants, access to credit and tax credits to investors.

The Israeli prime minister had recently visited India and I hope the government learns from Israeli programs that promote entrepreneurship. It would be interesting for readers to know that in Israel, the Angels Law is an incentive to invest in start-ups by deducting the investment amount, up to NIS 5 million (approximately $1.5 million), out of their taxable income, produced from any source for up to 3 years. Now compare that to our Angel Tax! Israel also has an excellent grants and tax incentive program to promote entrepreneurship, spur R&D, tourism and even a special fund called the ‘Nitzan Fund’ to incentivise agri-research.

The US government too, has several programs that encourage business to create and retain jobs, make capital investments, promote development in rural areas and promote innovation. The US Small Business Administration has been established to fund entrepreneurs and small business where private banks may not be inclined to. There are also a host of other grants, like the Small Business Innovative Research Grant program that provides $2.5 billion of annual grants.

The Indian government has done great work with the Atal Innovation Mission and Atal Tinkering labs which have focussed on grants to educational institutions, however, to accelerate commercialization, they need to partner with private for-profit incubators and accelerators.

My budget wish list includes the following 3 major reforms that will ease the flow of capital to start-ups, these are :

1.    Tax Incentives

Countries like Israel, China and the UK provide incentives for money to be invested in start-ups by making some or all the invested capital tax deductible to a certain limit.

Along the same lines, the government can encourage broader equity participation by removing capital gains on exercising ESOP’s.

The Angel tax must go or should only be applicable to start-ups over a certain valuation (say $10 million) - investing in start-ups is not like real estate where there is a circle rate!

2.    Allow Equity Crowdfunding

I am sure all of us have heard of Kickstarter which since 2009 has seen 14 million people contribute $3.5 billion to 130,000 projects. However, equity crowdfunding is banned in India. In a press release issued on August 30, 2016, SEBI found that: “ The electronic platforms are allegedly facilitating investment in the form of private placement with companies, as the offer is open to all the investors registered with the platform amounting to a contravention of the provisions of Securities Contract (Regulation) Act, 1956 (SCRA) and the Companies Act, 2013.”

We can learn by the example of the US or Italy, which was one of the first jurisdictions to pass a comprehensive regulation on equity crowdfunding. Italy specifically allows for crowdfunding to support the development of “innovative start-up companies”.

SEBI has issued draft guidelines in April 2017 and I hope that is passed into law this budget.

3.    Establish a Small Business Bank

Any entrepreneur will tell you that it is impossible to get credit for working capital. If you are working without a salary, you can’t get a personal loan. If an entrepreneur turns to a microfinance organization, the real interest rates can be as high as 24%. On the other side of the spectrum, venture debt providers look for large ticket sizes.

The problem is - Who is giving a small start-up 25 lakhs for working capital today? That is the unserved market.

The government has announced a loan program, but unlike the US where the loan process takes a week, the implementation is a challenge. It would be great if the government looked at the US, which has established the SBA. The Small Business Administration ( SBA ) is a United States government agency that provides support to entrepreneurs and small businesses by making loans through banks, credit unions and other lenders who partner with the SBA. They have an excellent microloan program where loans less than $25,000 require no collateral and they offer credit guarantee for loans up to $5 million.

I can go on and write a long wish list of demands that various startups and entrepreneurs want. If the government can waive off 100,000 crores of farmers’ loans, why not contribute 10,000 cr to an SBA type program? If the government is listening, just implementing the broad points above will go a long way in providing capital to fuel a billion dreams!

** Disclaimer: Views expressed are in personal capacity, not the official stance of Mumbai Angels Network

What Angel Investors Value Most When Choosing What to Fund

Regardless of all the attention and recognition venture capitalist gets, its far from the most common source of startup funding. Angel Investors - affluent investors who invest small amounts of capital, make their investment decisions quickly, and rarely require a board seat as a condition of investment. This makes them an attractive funding option for startups that don't need large investments and want to retain more control over their business.at an earlier stage than VCs do — fund more than 16 times as many companies as VCs do, “and their share is growing.”

Yet for how substantial the market is, there's relatively little data on the decision making process of those who invest in early stage startups. As a result, we're stuck with the question of how investors choose which startups to fund. It's hard to predict whether a novel idea will succeed, and these fledgling firms typically have no financial track record or tangible assets.

MANAGEMENT TEAM

“Whenever an angel investor receives a business plan, he would always read the resume section first”. Not because the people part of the new venture is the most important, but because without the right team, none of the other parts really matters.” Three-quarters of survey respondents said the management team of a startup was their biggest consideration for investing. “This suggests that a startup’s human capital is uniquely important to potential investors.”

ABILITY TO UNDERSTAND TECHNOLOGY

Many choose not to invest in specific businesses due to their inability to grasp their technology efficiently. "The easier we make it for angel investors to discover, evaluate and participate in science and technology startups, the more we'll see money going into these worthy companies and the benefits to humanity accrue,"

POTENTIAL RETURN ON INVESTMENT (ROI)

49% percent ranked potential ROI as their top motivator for making an investment decision. While some investors are indeed looking for financial compensation, not all are primarily interested in just the money. Some want a different kind of return: The ability to solve the world's biggest challenges through the businesses they fund. Nearly one-third of angels will choose to invest in a company based on its connection to important social issues.

Perhaps the best angel investment you could make is choosing the right company to work for. The value of the options associated with a successful company will swamp the return on any angel investment you are likely to make, even if you do happen to have a success.

Spoofin raises funding from Mumbai Angels Network

Spoofin is a video-based social network that allows it’s users to create and share hilarious parody videos. The app allows users to interact and manipulate video content by way of an intuitive creator’s studio, equipped with video editing, voice-over and audio imposing capabilities. The launch of their MVP in the international markets is scheduled early 2018.

Jatin Aneja,Deal Lead, Mumbai Angels Network & Partner at Shardul Amarchand Mangaldas

"Spoofin” is a strong product that presents an exciting opportunity to create a new and original social media network/community where the user can create, consume and share comic video content in an entirely fresh perspective. As a Deal Lead of Spoofin, I see this as an interesting investment opportunity with exponential returns upon gaining scale in a thriving yet uncluttered market. I would be helping & mentoring the company to grow.

Siddhant Sahni, Co-Founder, Spoofin

“The Mumbai Angels Network has been an instrumental part of our seed round journey. The network is teaming with investors who actively mentor and participate in the  progress of the startups, which was exactly what we were looking for. The introductions and networking opportunities afforded to us have been foundational to the successful close of our round"

About Mumbai Angels Network: 

Mumbai Angels Network (www.mumbaiangels.com) is India’s leading angel investing & mentoring network with 250+ members across four active chapters - Mumbai, Pune, Delhi and Bangalore. Their portfolio comprises of 90+ ventures across multiple sectors focused primarily on seed and early stage companies.

Calcutta Angels Network & Mumbai Angels network are now partners!

Calcutta Angels Network(CAN) and Mumbai Angels Network (MAN) announced a partnership today where both Angel Networks  will  be working together as a single team to bring the best, curated deals to their member base, faster deal closures with their combined strength, standardized deal closure framework and active management of the investment portfolio.

“Our partnership with Mumbai Angels Network will ensure our members get access to the best-in-class startups from across the country. We are also looking forward to extending the full membership experience that being a part of a larger network offers, including investing best practices, learning sessions, active portfolio management and active pitching of our invested portfolio to the next level investors. We are excited to partner with MAN in this first of its kind partnership in the country” said Calcutta Angels Network. 

“We are excited to partner with Calcutta Angels in Eastern India. With our nationwide reach of 4 chapters (Mumbai, Delhi, Bangalore and Pune) Mumbai Angels Network has the first access to the best start-ups in the country. With our innovative, process driven investing, we are able to steer the entire investment process smoothly right from curating deals, deal negotiations, deal documentations to actively managing the invested portfolio and working closely with the next level investors for exits. We are honoured to be associated with Calcutta Angels as a partner to bring the same rigour and innovation in angel investing to their member-base” Nandini Mansinghka, Chairperson, Mumbai Angels Network.

About Mumbai Angels Network: 

Mumbai Angels Network (www.mumbaiangels.com) is India’s leading angel investing & mentoring network with 250+ members across four active chapters - Mumbai, Pune, Delhi, and Bangalore. Their portfolio comprises of 90+ ventures across multiple sectors focused primarily on seed and early stage companies.

About Calcutta Angels Network: 

Calcutta Angels Network (www.calcutta-angels.com) started out in 2013 and prides itself for being the first angel investment network in eastern India. With a membership strength of 75 they have investments in 21 startups from across India. Their investments are stage and sector agnostic.