India has over 200,000 startups full of fresh ideas, demonstrating that people are eager to start their own businesses. These young companies have collectively attracted a staggering INR 13.42 trillion in investments. From individual angel investors to established venture capital firms, the whole country is placing its bets on the Indian startup ecosystem.
The key difference between investing and donating is choosing ventures with high growth potential and aiming for a profitable return. Here, we'll break down the different ways you can invest in Indian startups, from going solo as an angel investor to joining forces with a venture capital firm. Most importantly, we'll help you develop a keen eye for spotting those promising startups with the potential to make your investment soar.
Understanding Investment
Investing in a business usually involves paying a sum of money in return for some shares of the company. But that’s the rudimentary base. The actual process is quite complicated and has multiple layers that you must know.
Investors in Indian startups essentially acquire a stake in the company through their investment, exchanging capital for equity and a share in potential profits. This partnership means investors stand to gain returns based on their ownership percentage if the startup succeeds, but face the risk of losing their investment if it fails.
For example, there are different types of investors such as angel investors, venture capitalists, high net-worth individuals (HNIs), alternative investment funds (AIFs), and some others.
A question that often pops up in such scenarios is, “Can a normal person invest in a startup?” Although investing in a new business is possible, you need to know everything there is to know about it and have a deal in place that both parties agree to. Investing in startups can be rewarding as well as risky. That’s why it is important to know the stage of the business investment.
A startup goes through different stages of investment. A ‘Seed’ investment is the initial round of investment wherein you can invest in startups in India with little money. However, the risks are quite high, as the startup can fail in later stages. So there needs to be a balance between the stage of investment and the company’s valuation.
Building a Strategy
Money invested without any strategy is money wasted. You must build a proper strategy before even thinking of investing in any startup. So what does strategy building entail?
The first step is to identify your area of interest or expertise. You should invest in the field for which you have clear ideas and opinions. For example, if you have some experience in the fin-tech sector and know a few things about it, it will be better to understand a business in the fin-tech sector compared to, say, a clothing business.
The second step is cash and risk allotment. This is the step where you decide how much money you want to invest in a business and what kind of shares you want to have. It also includes a projected return on investment figure to estimate the amount of return you want to get from the investment over a fixed period.
You must also be aware of the potential risks of losing money if the startup fails. But more than that, you must be sure of what kind of growth you expect from the investment—a high-growth burst that increases your investment’s worth or steady returns.
All of these pointers must be properly noted in a strategy sheet and then evaluated to refine them. The better the investment strategy, the lower the risk of losing your investment.
Do the Research
Just like we do a lot of research while buying something expensive, investing in any business also requires extensive research. As an investor, you have to analyze and scrutinize every aspect of the startup before putting in your money. This analysis can be of the company, such as understanding its business model, target market, competition, and so on. Or, it could also be analyzing the people who run the startup—what’s their end goal, how passionate they are about their business, their qualifications, etc.
YNOS allow investors to analyze a startup before they decide to invest. This platform helps you view the complete background and financial history of not only the startup but also the founders and other investors. Access to this platform allows you to streamline your research with accurate and reliable information at your fingertips.
When it comes to company scrutiny, as an investor, you must look at all the nitty-gritty details of the company; does the startup run on a scalable business model that can become profitable? Is the competition so fierce that it might require years of investment to get good returns? What’s the growth strategy of the startup, and how do the founders plan to make it bigger?
The research step of investing in a business can take days or even months. Getting all the data, talking to people, finding out more about the founders, and then compiling all the data into a report is a time-consuming process and it is better to initiate the process while creating an investment strategy.
How to Invest
After all the research has been done, you can begin with the process of investment. Finding a platform to invest in startups in India is not too difficult, as the recent boom in the Indian startup ecosystem has created a wave of new entrepreneurs and government schemes that promote investment and business growth.
As an investor, you can choose to directly invest in startups that are at an early stage. The angel investor approach is ideal if you have a thorough understanding of the startup's operating environment or trust the venture's founders. However, there are risks involved because the startup is still in its early stages.
Venture capital funds offer a slightly safer approach to investing in businesses as their portfolios have pre-vetted startups. VC firms do their due diligence and often go for the businesses that have the best potential.
The Long-Term Plan
Investing in a business is a long process, but it is not the final step. As an investor, you must have a long-term plan for the investment. You can either invest the money or let the investment mature over time as the startup scales and becomes larger. The other option is to have a great exit strategy wherein you sell your shares when the startup merges, gets acquired or goes for an initial public offering.
Exit strategies discussed upfront between venture capitalists and entrepreneurs, determine how investors realize their returns. High-growth startups with strong management and organizational structures are more likely to be exit-ready sooner. Venture capital and private equity funds need to exit their investments before the fund's term concludes.
