AngelList is bringing its syndicate funds to Indian startups – but there’s a catch

Photo credit: AngelList.

Starting a venture capital fund can take a lot of time and effort. That’s where companies like AngelList step in. Its syndicate product lets any accredited investor create what is popularly known as a “pop-up VC fund”.

Let’s say you find an interesting startup or a particular sector that you want to invest in, but only want to place a relatively small amount of money into it. You can act as the “lead” in a syndicate and pitch to other potential backers – individuals with investable money – to pool in. It will be your responsibility to figure out whether the startup is worth it and to find extra money – but AngelList will carry you through the financial aspects of the process.

In an exciting turn of events, the company will now let accredited investors create funds to invest in Indian startups. Utsav Somani, AngelList’s new India head of operations, made the announcement that the company will be launching its syndicates platform in the country in a blog post on Tuesday.

The feature will take a year to launch. Utsav, who previously worked with AngelList’s India-bred competitor, LetsVenture, explained in the blog post that one of his primary roles will be to lead the company through the regulatory maze that comes with investing in India.

Will it comply?

In the past, disruptive startups in a competitive sector have pushed regulators into action in India. Will that be the case with AngelList?

Utsav told the Economic Times earlier this week that AngelList is looking to register its syndicate model as a “pooled investment vehicle.” According to India’s Security and Exchange Board – SEBI – that would make it an alternative investment fund (AIF). AIFs are separate from public investors and creditors – things like venture capital funds and private equity firms.

Anyone who operates as an AIF has to register for a license from the SEBI. The claim is that this is the case because those who are investing in startups and helping build out the country’s infrastructure deserve to get incentives.

There are three categories of licenses. The first goes to those like venture capital, early stage, and social impact funds. It also includes angel funds, which are a group of angel investors that are pooling together. Those that operate under this include the Indian Angel Network. The net worth of these angel funds need to be at least US$1.5 million.

The second is for private equity or debt funds. They don’t get incentives from the government, and can only raise debt for daily operational costs – not investment. The third license includes hedge funds.

These regulations were established in 2012, so they’re still vague – and don’t cover the type of services that a startup like AngelList offers. An alternative is to register as a crowdfunding platform – which is what its competitor, LetsVenture, seems to do.

It seemingly operates as an equity crowdfunding platform that works only with accredited investors. The accredited investors bit is an understandable decision for platforms that are attempting to democratize venture capital funding. If they open up to all investors, they may meet with more trouble than they need – like unkept commitments and outright fraud.

And yet, this term is still vague – accredited investors are defined by proposed guidelines for crowdfunding portals. SEBI’s proposal came out in 2014, but hasn’t reached a conclusion yet – which means there’s still no legitimate definition for an accredited investor.

Shwetha Chandrashekhar, a senior associate at GameChanger Law, describes the many nuances that regulators need to tackle well: “Crowdfunding calls for a finely-balanced regulation that recognizes the need for raising low-cost capital, facilitating access to funds and increasing liquidity on the one hand and the importance of ensuring investor protection and lowering systemic risks on the other,” she writes in a post.

Can it compete?

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