How to invest in startups in India? This is a common question people who want to invest in startups ask to gain valuable experience and high returns.
India has one of the world’s youngest populations, and its economy is expanding rapidly. This makes India an appealing place to invest in startups, as they will benefit from the country’s continued growth.
Furthermore, Indian entrepreneurs are known for their creativity and innovation, and they have been responsible for some of the world’s most successful startups.
Usually, high-profile investors chase growth-stage and late-stage deals, pouring unprecedented amounts of money into the Indian market.
However, this increased confidence in Indian entrepreneurs, even early-stage startups that gain even some attention, has led to attracting significant investor attention.
Why do startups need funding?
Startups are businesses that strive for hyper-growth, which necessitates a large amount of capital and resources. These are their only options, and in most cases, the capital comes from outside sources.
External sources refer to the capital used to run the business, which is not just the personal capital invested by the founder. These are the funds that individuals and businesses invest to grow and earn profit.
The investment in a company is made with faith in the business and thus provides money and other ancillary resources to assist the founders in making the Startup a success.
External investors receive shares of the business (stocks) and interest on the amount extended in the investment return (in the case of loans). This acts as an incentive for the company’s investors.
Pros of investing in startups
1. High reward potential
Startup investment is usually made when the company is small and has high growth potential to be the next big thing. As a result, if you capture the right bird early on, your investment could grow exponentially in a matter of years.
2. Being a changemaker
Startup investors invest in ideas and businesses that have the potential to change the world for the better. As a result, it provides an excellent opportunity for people to contribute to making this world a better place.
3. Side hustle
Many people who make angel investments see startup investing as a side hustle through which they can supplement their income. With the constant excitement and innovation in the startup ecosystem, it becomes an excellent avenue to devote your spare time to analysing and investing in startups.
Cons of investing in startups
1. High-risk investment
Because startup investments are made at such an early stage, the business model and team may not always be as stable as those of mature companies. As a result, there is a significant risk of losing your money if the startup fails.
2. High volatility
A startup’s first couple of years is extremely volatile, not only in terms of money but also of its founders, teams, other investors, market conditions, competition, and so on. As a result, when you invest, there is always a high degree of uncertainty and risk involved, both financially and emotionally.
3. Long-term holding periods
The average holding period for a startup investment is 7-8 years. As a result, it’s an extremely illiquid investment that might not be a good idea if you need the funds quickly for an emergency.
How to invest in startups in India: key funding types
Parameters | Equity Financing | Debt Financing | Grants |
| Definition | Selling a fraction of a company’s equity in exchange for financing is what equity financing entails. | Borrowing money and repaying interest on these funds is what debt financing entails. | A grant is a financial award given to a company by an entity to expedite a goal or incentivise performance. |
| Investment type | There is no repayment component for the invested funds. | Invested funds must be repaid with interest within a specified time frame. | There is no repayment component for the invested funds. |
| Risk | For investors: investment comes with no guarantee For startups: need to surrender a portion of their ownership over the company to shareholders | For investors: the lender has no say in how the business operates For startups: as collateral, you may be required to provide a business asset | For investors: there is a risk that the startup will fail to meet the goal or objective for which the grant was provided For startups: there is a risk that the startup will not receive a portion of the grant for a variety of reasons |
| Commitment threshold | While startups face less pressure to meet repayment deadlines, investors are constantly striving to meet growth targets. | Startups must constantly adhere to repayment timelines, which necessitates greater efforts to generate cash flows to meet interest repayments. | Grants are distributed in various tranches based on the achievement of the corresponding milestone. As a result, a status is constantly striving to meet the goals set forth. |
| Type of return to investors | Capital growth | Interest on investment | No returns |
| Participation in decision-making | Have the right to participate in decision-making | Have very little say in decision-making | There is no direct involvement in decision-making |
| Investment source | Self-financing, Family and Friends, Angel Investors, Venture Capitalists, Incubators/Accelerators, Crowd Funding | Government Loan Schemes, Banks, Non-Banking Financial Institutions | Grant Programs of Private Entities, Central Government, Corporate Challenges, State Governments |
How to invest in startups in India: Startup funding lifecycle
Equity financing and debt financing are popular types of funding among new-age entrepreneurs.
Startups can get money from a variety of sources. However, the source of funding should typically correspond to the startup’s stage of operations.
Please keep in mind that raising funds from outside sources is a time-consuming process that can easily take more than 6 months to complete.
Type of investment | Angel Investment | Venture Capital | Venture Debt | Private Equity |
| Startup stage | Idea stage | Prototype stage | Growth stage | Pre-IPO stage |
| Type of investors | Family, friends, HNIs | VC firms move the capital from sources such as HNIs, pension funds, and so on | Debt funds move the capital of pension funds, insurance companies, and other institutions | Private equity firms move the capital of hedge funds, large multinational corporations, and other entities |
| Investment holding period | 4-5 years | 8-10 years | 1-3 years | 5-8 years |
| Exit event | Event for raising institutional capital | Acquisition of IPO | No exit event | Acquisition of IPO |
| Risks involved | Very high risk-reward ratio | High risk-reward ratio | Moderate risk-reward ratio | Moderate risk-reward ratio |
How to invest in startups in India: Things to keep in mind
There are a hundred things to consider before investing in a startup, but here are the major ones that should be on your checklist for sure:
The idea
Generally, a startup investment is simply an idea with a small sample testing to validate it. As a result, it is critical to fully comprehend the concept and the business before investing your money.
Founders
With little validation to rely on as a startup investor, founders become the most important figures. Founders are in charge, and as a startup investor, you are investing in both the idea and the people who will put it into action.
Target market
For a startup to provide a good return on investment, it must either cater to a large enough market or a niche market with less or no competition to have a good future potential.
Competitors
The goal of a startup is to grow at an exponential rate and become the dominant player in the market.
As a result, it is critical to understand what other players are already in the market so that the company in which you may potentially invest has good strategies for dealing with them.
What do investors look for startups to invest in?
Choosing a startup to invest in is a difficult task. Listed below are a few pointers you must look for:
Uniqueness
Is there a distinguishing feature of the startup that gives it an edge over competitors in the market?
Scalability
Is the product scalable in the context that it will sell and that the market and firm will be able to support growth?
Market size
Does the target market that the startup is catering to have a lot of potential?
Team
Is the team capable of carrying out the company’s plan?
Sale ownership
Is the asking price for the equity a good deal?
Usage of funds
Will the money raised be enough to carry out the business plan, or will more funds be needed? If more funds are required, your equity will be diluted, lowering your ownership percentage.
On a concluding note
To summarise, investing in an Indian startup is akin to embarking on an adventure. There may be highs and lows, and tidal currents opposing your sail, but if you hold on and share your wisdom with the sailor, you will set out to achieve your goal.
