How to Invest in Startups?

 

Mr Ashish Aggarwal, CEO of Acube Ventures defines a startup as a company that aspires to give rise to an ingenious product or overture a service in order to make an imprint on the status quo and thus iron out a major crisis in the cycle. For example – Zomato made an app to connect the food joints and the foodies, a concept that disrupted the everyday food cravings disregarding the time and place constraints. This efficiently solved the hardships of both stakeholders in an inventive manner.

What discerns an established company from a startup is however not the certain product or service (nonetheless, in a few cases it may) but the manner they both function. A conventional business scales at a very uncrooked rate through organic expansion ploys and is generally profitable from day one. However, a startup conducts its operations with the aid of large sums of borrowed (or retained) capital and other resources and thus may not even be prosperous till a couple of years into operation. The emphasis points for both types of business are very disparate and antithetical which is basically what distinguishes a startup from all the other categories of companies that exist out there.

For example – Meta (formerly known as Facebook) became one of the most substantial companies in the world within a decade, but there are businesses that have prevailed for two to three decades and haven’t been able to match the pace of Meta.

It is striking that not all startups are able to attain colossal development and it primarily depends on the idea and the mindset of the startup. A growth mindset is what steers a startup.

 

Startups need considerable amounts of money to withstand the market's cloudy skies as those are companies that conduct their operations with a hyper-growth viewpoint. They certainly need massive amounts of capital and resources to fulfil the same which in maximum cases has to land from external sources. External sources mean the funds (capital) used to run a business are not the personal funds brought by founders or directors of the business but from the investors external to the enterprise.

These external investors show their belief in the business after analyzing their plan and thus lend money and relevant ancillary resources to support the founders/promoters to bring about the startup's success. In return, they are given the title of the company (equity) and interest on the amount lent (in the case of loans). These act as a source of motivation and are referred to as  “incentives” for investors (individuals or firms) to invest in the business.

There are a hundred pointers that could form a list to keep in mind before investing in a startup, nevertheless here are the prominent ones that should be on your checklist for sure:

1.            Proposed Idea –  A startup investment is just an idea with a small specimen testing for assurance. Hence it is really critical to thoroughly understand the laid plan with intention and the business before putting your money in.

2.            Promoters – They are at the helm of events and decisions of the company, and as a startup investor you are investing in the idea and the people who are going to be implementing the idea hence they must be known to you.

3.            Market Spectrum– For a startup to give you a promising return on your investment, it needs to cater to a vast enough market so that it has a reasonable potential for being substantial in the future. A business catering only to a limited locality can ideally never be called a startup since startups functions on a vast scale in their pursuit to achieve “leading” status.

4.            Competitors – Startups are all about accomplishing heights at an exponential rate and evolving to be the dominant partaker in the industry. Hence it becomes very vital to know what other performers already subsist in the market.

A retail investor can partake in different investment alternatives across the existence progression of a startup. The investments can be further analyzed into two categories:

1.            Direct Investment – When the investor directly invests in the specific startup without any third-party associate like a Venture Capital/ debt/ private equity firm is called direct investment. Angel investment is a direct form of investment.

2.            Indirect Investment – When the investor invests in a Venture Capital/ debt/ private equity firm and then the PE firms invest in numerous startups employing the money they have raised from investors.

The following steps are involved in investment through indirect options:

•             Contact your investment/financial advisor.

•             He/she will study and explore different alternatives and will provide you with a list and profiles looking to raise capital at the time.

•             Go through the available preferences and conduct your own research based on the factors like credentials of the fund manager, holding period, target returns, type of asset class, specific sector, theme, market, historic performance etc.

•             Arrange a meeting with the financial advisor to clear all the queries before taking it forth.

•             Generally there will be some clerical work involved. Arrange for relevant documents to avoid any discrepancies.

The industry expert, Ashish Aggarwal says, “The startup congregation in India is at an exhilarating phase right now with agreements and activities happening at a phenomenal rate. This provides a great vacancy for a lot of retail investors to invest and harvest the returns of the terrific Indian startup anecdote.” He further adds, However, it is important that you exercise vigilance like any other investment and comprehend your investment appropriately before going forward with it.