Angel investing: Individually or through a fund?

Angel Investing in startups is not similar to investing in mutual funds, securities, bonds, or the stock market. Being in the angel investing ecosystem for the last 2 years, I am constantly learning and understanding the challenges and opportunities one faces as an investor.?

Offering funding or financial backing to promising startups in exchange for equity in the company, sounds exciting. Each individual wants to explore different markets, diversify their portfolio, and make money. But like any other investment, there is risk involved when one chooses to invest in a startup.

There are two paths to angel investing: (i) Direct Angel Investing and (ii) Angel Investing through a Fund. The course one chooses to traverse has its advantages and disadvantages.

Direct Angel Investing

Advantages for the investor:

1. Chance to connect and work with the founder personally on a day-to-day basis.
2. Investor becomes an intrinsic part of the startup’ journey from its infant stage until it grows to mid-sized/large company.
3. In challenging times, the investor can mentor and guide the founder(s). ?
4. Involvement in decision-making in key matters.
5. Involvement on the direct cap table with the founder.
6. Flexibility to decide when to enter a particular startup or exit when there is an option of a secondary buyout.?

Disadvantages for the investor:

1. One has to do a thorough self-study, due diligence and background check on the founder and startup, as each decision made is as per the investor’s individual capacity.
2. Heavy reliance on co-investors who come on board for funding.
3. Constant involvement and assessment is required by the investor.
4. High risk involved if the start-up founder fails to grow or pivot.
5. The investor has to go through the tedious process of documentation and legal contracts.
6. Investments may be blocked with one particular company especially if it’s a significant amount, and the investor may not be able to diversify.

Angel Investing through a Fund

Advantages for the investor:

1. The fund does a background check on the founder and company thoroughly.
2. ?As it is a fairly long term investment, certain factors like whether founder's are malleable to expert advice, ready to pivot, etc. is ensured by the fund.?
3. One gets a plethora of startups to choose from and is not stuck with a handful options. It is possible to invest in multiple startups they are inclined towards and passionate about.
4. Onus is on the fund to periodically update about the startup's progress, evaluation of due diligence reports and financials, as the entry and exit is taken care of along with documentation.
5. There is lesser risk as the startups are curated in a detailed manner.

Disadvantages for the investor:

1. The investor is dependant on the fund managers as they take the decision on when to exit from a startup as per their assessment.
2. There is exposure to only certain companies which the fund has to offer.
3. Membership fee may be applicable in some cases.?
4. Carry fee: For example, if you invest Rs 10 lakhs and your investment grows to 50 lakhs, the fund will take a significant % share of the profit for managing your fund.
5. One can only invest in a company the fund approves.
6. One has zero say in the managerial discussions and decision making process of a startup unless they are a lead investor in that round of the fund.?