Investing in Startups for retail investors- No more a big boy’s game?
“Every start-up is the thriving brainchild born out of a person who dared to execute his passionate idea.” India has seen a massive rise in start-up success rates in the past few years, higher than that of any other country, which in itself is quite impressive. With start-ups growing like never before with an increase of around 20 times more funding from 2016, this might just be the perfect time for retail investors to pump funds into one of these future giants.
India has emerged as the 3rd largest ecosystem for startups globally and investing in a budding and innovative start-up comes with several benefits. However, it does come with risks. After all, what doesn’t?
In a country like India, where the population prefers to invest in safer, fixed and less-yielding options like FDs and gold, start-ups heavily depend on VCs and big investment houses for funding. In this article, we will cover everything a retailer investor needs to know about having a share in an emerging startup, including the benefits, scope and of course, the risks.
Why should you invest in startups?
Investing in a start-up, especially at its early stage is a great way to capture a share of a potential future multibagger in terms of growth and revenue. Apart from an immense scope for high returns, investing in a start-up helps you gain better exposure to the market and is a great way to be a part of a young and innovative idea. For retail investors looking to invest beyond the wall of traditional investment plans, stepping foot into the world of start-ups and IPOs makes way for a fantastic opportunity to grow your wealth.
The upsides of investing in start-ups:
Very high growth potential
Fueled by the spirits of passionate entrepreneurs, start-ups can be solely classified by their exponential growth trajectories. Unlike established firms, they hold the potential for immense growth averaging at about 200% in the initial years. As an investor, investing in an early stage start-up will increase your chances of crafting a high return yielding investment.
Diversification of portfolio
Diversification of investments is the key to a retail investor’s sustainable growth, and there is no better place to do that than start-ups. With start-ups plunging into every industry, it becomes easy for investors to create a diverse investment portfolio to manage risk and stabilise returns. By investing into various industries such as tech start-ups, health-care innovations or sustainable ventures, risks are spread increasing chances of high ROIs.
Being part of a transformational idea
Investing in a start-up is the ideal opportunity for someone to be a part of something bigger. Start-ups are driven to make an impact in the society by disrupting traditional industries. Hence, the probability of a start-up making a difference in the world is never low, and to be a part of that is just another cherry on the top.
The chance to get in early
Unlike established firms that may offer stable returns, start-ups are generally in a stage of taking off to newer heights. Therefore, being a part of it before it takes flight is the best way to invest in the next big thing. According to the Kauffman foundation, successful start-ups generate around 6000% of their initial revenue at the five year mark, given the risk of failing. Early stage investing is risky, but it can lead to unbelievable ROIs if done correctly.
Risks for retail investors who invest in startups:
Higher risk of failure
Regardless of immense growth opportunities and high returns, investing in a start-up is still not child’s play. India has not been kind to start-ups. According to stats, around 80% of the start-ups in the last five years never made it past the 5 year mark. Despite the benefits, investing in a start-up still poses a high risk to reward ratio and is only for those who are willing to accept the risks that come with it.
Low liquidity
Unlike stocks or investments in established companies, start-ups offer very less liquidity, meaning that you might not be able to exit your investments in case of financial emergencies. They cannot be sold or traded on public markets, making it hard to cash out when you need it the most.
A longer waiting period
Investing in a start-up will not make you rich overnight. As a retail investor, patience is key when expecting a successful return of investment in a start-up. Start-ups generally take a longer timeframe to generate returns than an established company and this can vary from a single year to maybe a decade.
Emotional attachment
Retail investors have a habit of getting emotionally attached to their investments. Hence, in the case of investing in start-ups, this will only get you so far. Such emotions can cloud your judgement, in-turn being blinded about proofs that contradict your picture of the company.
Best ways to invest in startups:
Private equity
Equity is the most common platform used by retail investors to invest in emerging start-ups. In this case, investors acquire a certain part of the company’s equity in exchange for the investment. Investing in equity enables your investment to grow along with the progress of the start-up. Equity financing is India’s most popular funding strategy with more and more retail investors stepping foot into the start-up funding domain. Here are some ways you can invest in startups through equity.
- Private equity funds
These are investment pools managed by professional fund managers where money is pooled from various investors which are combinedly invested in a company, in most cases a budding one.
- Angel investing platforms
Angel investing platforms that allow individuals to invest in early-stage startups alongside experienced angel investors. These platforms often provide access to a diverse range of investment opportunities and provide support throughout the investment process.
- Equity crowdfunding
Equity crowdfunding campaigns help startups looking for capital to grow their business. Here, retail investors have the opportunity to fund relatively small amounts in exchange for equity in the company.
Debt
The essence of debt financing involves borrowing funds from either individuals or companies towards the welfare of the start-up under the condition that the company repay the debt amount as interests as negotiated by the investor and borrower. Options such as asset leasing, invoice discounting and bonds stand out as the most effective and affordable ways of financing to invest in start-ups in India.
It is a financial arrangement where one party owns an asset and grants another party the right to use that asset for a specific period in exchange for regular lease payments. You can invest in asset leasing platforms for attractive interest rates for the money invested.
Invoice Discounting is a financial tool allowing businesses to take short-term debt against an invoice to continue their daily business activities. Investors can choose to invest in such schemes, especially into start-ups to diversify their portfolio.
Bonds are a type of fixed-income investment where investors lend money to a corporation, generally to startups in exchange for periodic interest payments, and the return of the initial investment at a specified maturity date.
IPO
An Initial Public Offering or IPO is when the shares of a private company are issued for public sale for the first time. This is usually done when a company wants to raise funds for its expansion, clear debts, and meet working capital requirements. An IPO is a great way of financing to invest in a start-up because of its potential for quick returns and lower risks than existing stocks.
Things to keep in mind before investing
As a retail investor, the decision to invest in an emerging start-up should not be a spontaneous or instinctive one. Do proper research of the start-up before choosing the one that matches your risks and investment. Rome wasn’t built in a day, so won’t be a start-up, hence, patience, risk management, and realistic expectations are a necessity if you are looking forward to investing in these future giants.
The bottom line
For retail investors, a direct investment into a start-up that involves a huge chunk of money is never a practical option. However, with various other financing methods to choose from, investors are now able to enter into the domain of investing in start-ups with ease. Using several risk mitigation strategies such as investment diversification, thorough research, and considering long-term growth potential, retail investors can safely enter a space dominated by large investment houses.
If you are a retail investor looking to grow your wealth by stepping out of the traditional methods of investing, Tap is here to help. With asset leasing, bonds and invoice discounting that offers up to 15% returns within short periods, your financial wealth is a tap away.
FAQs On How To Invest In Startups?
1. What is a safe way to invest in start-ups?
Among the various options available, Debt. and IPOs hold the potential for safer returns compared to private equity.
2. What are some of the unconventional ways to invest in start-ups?
Apart from equity which still stands as the most common ground taken by investors, debt financing into start-ups such as asset leasing, bonds and invoice discounting stands apart with its potential for decent returns within shorter periods of time.
3. What is an example for asset leasing?
A startup needing laptops can lease them inviting investments from multiple retail investors who can enjoy fixed payouts on their investment over a specified tenure.
4. What is an example for invoice discounting?
After the completion of a project, your company raises an invoice of Rs. 20,000 to another company. Generally, businesses take a credit period of 45-60 days to repay this bill. During this credit period, you are faced with a short-term cash flow crunch. To solve this immediate cash requirement, you may opt for invoice discounting, where you can take a short-term loan against these accounts receivable.
