Startups in India are on the rise. A few weeks ago, there was a lot of clamor on social media about the unicorns in the Indian market. Moreover, a Unicorn is a startup company with a value of more than $1 billion. The following list of companies has qualified as Unicorns in the Indian startup ecosystem. We discuss what it holds for the retail investors and can they get by investing in startups in India in this article. Let's begin!
What are startups in India?
Start-ups in India are new-generation business ventures. It also involves young entrepreneurs. Built around an innovative idea or problem, which has the potential for becoming a big business in the future. They thus have an impact on the market. A committed group of people with an exciting idea, which the markets have not known yet, work in these startups to make it into a reality. Moreover, India added 1600 tech startups in 2020 to take the total to 12,000 as per the NASSCOM report.
Should small retail investors invest in startups in India?
We often hear statements like, "If you had invested Rs___ lakhs in _____ in 20XX, the value of your investment would have been Rs ___ crores in 20XX." Thus, it feeds to your thoughts. Indeed, such success stories consequently compel an investor to consider investing. Yes, it is a tempting opportunity for wealth creation but is equally risky.
This brings us to our question, should retail investors go for it? Moreover, given the clearances from the regulator and subject to you knowing the process of such investments, it is surely an option. However, given our personal experience regarding such options, it is an extremely risky choice. Agreed, that it looks glamorous from the outside and catchy, the risks for small investors are huge.
Data points, therefore, suggest that such an investment is risk-prone for small investors. The risks thus outweigh the gains made from such an investment. Very few startups in India succeed, as per the 2016 IBM-Oxford Economics report. Furthermore, the failure rates for startups in India are as big as 80% to 90%. Consequently, one can say that you can lose 80% of your investments in such a startup.
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Does the success of the startup in India also translate into investor success?
Easier said than done. Highly complicated to say the least. Why do we say so? Have a look at these stats based on the Medium study,
|Funding sequence||Failure to raise the following round||Failure to Exit|
|Seed(to Series A)||79.4%||97%|
|Series A(to Series B)||50%||88.7%|
|Series B(to Series C)||55.8%||84.1%|
|Series C(to Series D)||62.1%||80.7%|
|Series D(to Series E)||66.4%||78.1%|
|Series E(to Series F)||69.2%||74.3%|
|Series F(to Series G)||75%||74.5%|
|Series G(to Series H)||82.6%||72.4%|
As you can thus see, it gets really tough for the startups in India to keep raising money. Consequently, it is natural for such investors in startups to aim to make money sometime in the future.
So how does an investor make money from angel investing?
It is thus about finding the right opportunities to encash by investing in startups. Moreover, there is a limited option on this front,
1. Another company acquires the startup.
2. IPO is launched by the startup.
3. Investors sell off their shares to other investors in the subsequent rounds.
4. Finally, the startup becomes successful and pays dividends.
Furthermore, most investors follow option 3. That is thus to sell their shares to other investors in the upcoming rounds. But, this isn't easy.
For you to exit the startup, there has to be a buyer. Also, it is not easy to find a VC who is interested in buying your shares. PE or VC funds should also be offering a better price for you to exit the investment. Most of those willing investors thus seek to invest more funds into the startup for its growth. Consequently, if that is the case then the early investors will have to accept lower valuations. Thus, this limits your option to exit with some profits.
You might have to wait for many years to exit and yet there is no guarantee. Recall the failure of startups in India!
Are startups a good investment?
Indeed. Startups in India can be a good investment option if you choose the right one. However, the chances are very low. We stress on this, that it is very low. Hence, it is not suitable for small investors with a limited capital pool(given they are eligible).
HNI's and UHNI's already have a diverse portfolio. They might consider investing a small percentage(5% to 10%) into the startups in India. There's some logic to it.
Think about this. If you invest in multiple startups, most might fail while some would do average. Finally, only a few would do well which would thus generate those catchy returns.
Now consider the small investors who will not have that financial appetite for investing several lakhs of Rupees into multiple startups. Hence, it is proved that startup investment is not for everyone. You might come across platforms offering very small investments, but it still does not dilute the risks.
So, small investors should not play around with their hard-earned money in such options. Yes, they offer an opportunity to make disproportionate profits. But the chances are very less and you might lose all your money. Startups lock up the invested money for many years unlike mutual funds, where you can pay an exit fee and redeem.
Thus, if you are a small investor who is excited about investing in startups, we recommend you get your basics right. First, create an emergency fund, be clear about your financial goals like children's education, buying a house, or retirement planning. Subsequently, invest a small amount regularly in SIP equity and debt funds for these goals.
Once you have a surplus left, consider PMS(again not suitable for everyone but can be considered). Finally, the idea of investing in startups should be looked at. We thus hope it clears the pros and cons of startup investment to you.
Lastly, go for this only if you can afford to lose the investment. We agree that the temptation to invest in startups is big. But making money is hard. If you have an access to a big investor who knows the game should you invest, else avoid it.
Startups in India are writing a new chapter for the country. They are an attractive investment option. However, it involves huge risks, and given the poor track record of startups, it is not suitable for small investors.
Moreover, small investors have to keep a lot of things in mind before investing in a startup like having an emergency fund in place, be clear about their long-term goals and invest regularly in relevant SIPs. Once you're having excess money and some access to a big investor with good knowledge, should you invest else avoid it totally.
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