Part 8 of 21 in A Guide for the First-Time Indian Angel Investor← Part 7Part 9 →
This chapter discusses the common pitfalls and misleading practices in the Indian angel investing space. It highlights how fees, syndicates, and social pressures can affect investment decisions.
- Syndicates often charge multiple fees, affecting investor returns.
- Wealth managers may not align with long-term investment goals.
- Investors should be cautious of 'cool tax' and social pressures.
- It's important to understand who benefits financially if a company fails.
Syndicates, wealth managers, and the cool tax. The product is often the fee, not the company.
A good syndicate is a gift: a lead who has sat with the founder, who will tell you the bad fact, who takes a disclosed carry, and who does not vanish after the wire. India has some of these. It also has a sales layer that discovered HNIs will pay for access. Access is not underwriting. A logo on a deck is not a lead investor. A WhatsApp group called “deals” is not diligence.
The syndicate stack
Read the cost on a five-lakh cheque before you admire the company. A setup fee. A vehicle administration charge every year. A carry of ten or twenty percent to the lead, sometimes on the deal and sometimes again if the vehicle rolls into a fund. A success fee to the platform. Legal costs socialised across small tickets so that the smallest investor pays the highest percentage. None of this is inherently crooked. Stacked on a power-law asset, it moves the break-even. Your twenty-times winner may be a twelve-times winner by the time it reaches you, and your one-point-six portfolio may be a loss. Ask, in writing, who gets paid if the company dies. If the answer is “we already got paid,” you are the product.
The wealth-manager version
Private banks have a startup slide now. It sits beside the PMS and the tax-free bond. The relationship manager is not a venture investor, and the incentive is rarely aligned with a twelve-year hold. The tell is bundling: a fund of funds wrapped around funds, each with a fee, sold as sophistication. Two layers of management fee and two layers of carry will humble any multiple that is not obscene. If you want a manager, buy one manager, with one fee, a stated portfolio construction, and a report that includes the dead companies by name. If you want to choose, choose. Do not pay both prices.
The cool tax
Some cheques are not missold by anyone but the buyer. The founder is photogenic, the sector is in the newspapers, a cricketer is an advisor, and the HNI wants to be the person who “got in early.” This is a consumption decision. Consumption is permitted. Call it consumption. The moment you enter it in the same mental account as the equity mutual fund, you will make a bad follow-on decision to protect your pride. Pride is an expensive general partner.
There is a related Indian pattern: the obligation cheque. A friend’s child, a patient who became a founder, a cousin in the same business house. These cheques are social, and social cheques should be tiny, disclosed to yourself as gifts, and never used to justify the next one. Maher’s alternative investor is honest about motive. The obligation investor pretends it was a thesis.
If the urgency is the round closing on Friday, the round can close without you. Good companies raise again. Bad documents do not improve over a weekend.
Frequently asked questions
What is the 'cool tax' in angel investing?
The 'cool tax' refers to investments made for social status or personal pride, rather than sound financial reasoning.
How do syndicates affect angel investing in India?
Syndicates can charge various fees that reduce investor returns, such as setup fees, administration charges, and success fees.
Why should investors be cautious of wealth managers?
Wealth managers may not have incentives aligned with long-term venture investing, often bundling multiple fees that reduce returns.
What should investors ask about fees in angel investing?
Investors should ask who gets paid if the company fails, to understand if they are the product being sold.