Investing is the new buzz word, isn’t it?
The first half of 2021 saw a whopping $10.8 Billion total capital inflow towards the Indian startups (source).
This humongous achievement won’t make sense without comparison with the situation a decade ago.
In 2010, the total funding raised by startups in India was $550 Million (source).
This highlights how investor sentiment towards the startup ecosystem is undergoing a revolution.
Infact, you may have heard a friend (or a friend – of – friend) talking about wanting to invest or having already invested.
The younger generation is the new economic backbone of the country – and they’re distancing themselves from the traditional investing methods like real estate or F.D.
Does the booming startup funding present an alternative opportunity?
Here’s a complete guide on investing in a startup:
What is a Startup and What is an Investment
Startups are innovative young companies aimed to scale a product or a service by making it marketable. They solve a problem or fill a gap in a niche to be irreplaceable for the customers.
Speed and growth distinguish startups from other entities (source). This rapid expansion generally needs funding. The first big challenge for any startup is to search for investors and pitch to them the validity of their idea.
This is where investment comes into play.
Investment involves making a purchase of an asset with the intention of profit or accumulated gains.
There are many sources to secure an investment – friends, family, bootstrapping or self financing, crowdfunding, angel investing, incubators, accelerators, venture capitalism, banks, grants, government schemes, and more.
Why Do Startups Need Investment
Startups may need investment to achieve various milestones (source):
- Team Hiring
- Prototype Creation
- Product Development
- Raw Materials and Equipment
- Infrastructural and Administrative Needs
- Legal Services
Entrepreneurs approach the investors not before objectively analyzing their detailed financial and structural plans to determine their needs.
Risk and Reward of Investment
Everyone invests with an intention to profit. But it is, of course, not always a gain – based ride.
Investing in startups, for instance, is a high – risk venture.
Investopedia rightly states that startup investment isn’t for the faint of heart. It’s a commonly known truth that 90% of the startups never make it to the IPO and don’t go beyond the 10 year mark.
The timing is usually uncertain and a rapid, competitive market can pose a threat to make the idea obsolete, tragically ensuring that the entire investment can be lost.
Well then, why do people even invest?
Let’s get straight to the meat of the matter.
Google, Amazon, Facebook, PayTM, Uber, Ola, Flipkart, OYO rooms, Netflix, Zomato, Swiggy, BYJU’s, CRED, LawSikho were/are startups.
They turned out to be immensely profitable giving a high return on investment. All of these were highly risky to invest in, but the returns have been pretty insane.
This story highlights Gary Tan’s 6,000 times return on his $300,000 investment to Coinbase. At IPO, he was worth $2 Billion.
When it comes to equity crowdfunding platforms, it’s advisable to chip in small amounts of investment and diversify the portfolio for relatively better outcomes.
Before addressing crowdfunding, it’s crucial to get insights on the changing profile of the investor.
The New Investor is You – Transforming Trends
The mindset behind investment is to make your money work for you rather than just keeping it stagnant.
Examining the Millennial investing behavior shows that there has been a 35% rise in investment in Mutual Funds assets in April 2021 (source) as stated by the Association of Mutual Funds in India (AFMI).
This wasn’t the case 2 decades ago; investment in India was next to none (predominantly limited to real estate or Fixed Deposits).
Today, cutting edge FinTech platforms have made investments highly accessible to Millennials and Gen Z (source).
It’s now possible for them to diversify investments with just a few clicks by using multiple instruments – MF, stocks, startups, insurances, and more.
Evolving innovation in Fintech platforms have presented an opportunity for the younger generations to be in-charge of their own finances.
Yes, you can be an investor too.
Stages of Startup Investing
Every startup has various financial stages. Investment occurs in accordance with those stages (source).
|Consists of just an idea or a prototype.
Seed Funding by friends, family, or co-founder(s)
Grants/ Local Contests
|Consists of a working prototype
Tests and trials are conducted on potential customers
Efforts are there to build a team
|Consists of market launch
Includes analytical performance indicators
Efforts to multiply users
Also known as the Series A Stage
Banks/ Non Banking Companies
|Consists of increasing revenue and market growth
Also known as Series B, C, D, E
|Venture Capital Funds
Private Equity and Investment Firms
|Executed by the investor in 2 conditions –
1. The profit objective is met
2. Exit a non-performing investment
This is a contingency plan to either leave with a profit or limit the losses
|Mergers & Acquisitions
Initial Public Offering (IPO)
The investment option usually matches the operational stage of the startup and sourcing of funds from extrinsic entities is a lengthy process.
What are the Different Ways through which I Can Invest in a Startup?
Be the Seed Which Grows a Startup
Here, you’ve got to be an insider; a friend, family member, or a fellow co-founder.
If your friend starts a promising business initiative and approaches you to fund his venture, you can provide the initial seed money to get the cogs of the wheel rolling.
There are only 2 criteria – being related (either through love or through blood) and being able to believe in the idea.
Do you know someone whose phone cover comes with an attached popsocket?
Popsockets are useful to conveniently hold mobile phones and are actually pretty big amongst people.
This idea was launched in the form of a startup in 2010 by a Philosophy professor in Colorado, David Barnett.
His crowdfunding campaign on Kickstarter in 2012 made it one of the wildly successful businesses. They’re the best – selling products on Amazon in the category of cell phone accessories.
The crowdfunding raised $18,591. In 2018, its revenue was $200 Million (source).
Crowdfunding, hence, is a form of alternative financing through which startup owners raise small amounts of capital from a large number of people to fund a new business idea or a project.
FinTech investment platforms are being flocked by young investors as they offer crowdfunding opportunities for promising new startups in an accessible way.
Online Equity To Raise funds via Tyke Invest
Over at Tyke Invest, you can be an investor by funding a startup with an amount as low as ₹5,000.
This platform operates on the principles of equity crowdfunding; a large number of people invest in a startup in exchange for shares in the company.
You neither have to be a high net worth individual nor do you need to be accredited in order to invest in the sector of your choice. Even if you’re living from a paycheck – to – paycheck basis, you can invest a reasonable amount after performing your own due diligence process.
This cutting edge platform has made all of this to be accessible enough that it’s done within minutes.
Can You Be an Angel Investor?
The first big investment break for startups occurs through Angel Investment.
How do you know you’re an Angel?
Check your net worth. In India, you need to have a total tangible assets of at least ₹2 crores excluding residence (source).
Check if you’re a serial entrepreneur/ have an early stage investment experience/ are a senior management executive with 10 years of experience.
If you don’t fall under these categories, alternatively, you either need to have a body corporate with a net worth of at least ten crore rupees or must be registered under certain regulations (AIF/ VCF/ SEBI).
If there’s a yes to any of these criterias, then you can provide capital for a startup in exchange for either ownership equity or convertible debt.
Angel investors provide funding to startups initially when most investors will not be willing to take the risk.
This Brings us to Convertible Securities
Juul is a famous e – cigarette venture raising $700 Million in Convertible Debt.
This is a form of debt instrument where the investment will get converted into equity before the next round of investing (usually at a discount to benefit the convertible investor).
This modality is typically used by early stage startups when the valuation is uncertain, but Juul is by no means early stage.
In this case, Juul is using this instrument like a bandaid in the face of declining valuations (source).
Here, the security is structured like a debt that is set up to convert into equity at some later point.
These debt instruments accrue interest and have a maturity date.
SAFE Notes (Simple Agreement for Future Equity), on the other hand, are an evolved form of Convertible Securities that allows a startup to take on an investment which will convert into equity in future sans the aspect of debt.
They’re simple 6 paged agreements aimed to get quick funding for the startups while warranting future ownership to the investor.
Venture Capitalists are investors who have collected a fund of money for investments and spread it around for burgeoning companies.
Giants like Google, Amazon, and Facebook were backed by VCs during their initial stages.
Startups initially can’t guarantee returns or collateral when it comes to taking traditional loans. This is where the logic of venture capitalism comes into play.
A percentage of the company is bought from the founders by VCs or VC firms if the business demonstrates a potential to be highly profitable. This way, the founders don’t have to commit to recouping the loan along with the interest rate.
VCs provide capital in exchange for a portion of ownership in the startup along with the rights to its potential profits in the future. This is called equity, or ownership.
The chances of growth increase as the investors also offer guidance, resources, and managerial expertise to shape the business.
The downside to this is that the startup needs to display the promise of astronomical growth to attract VC backing.
Frequently Asked Questions (FAQs)
How do I go about online investments in startups?
For equity crowdfunding platforms, Tyke Invest is the best platform to explore startups from different sectors and start the investing process with the amount as low as ₹5,000.
The How It Works section explains the seamless process; it’s as easy as making your own profile, exploring startups and going through their pitches, hitting the invest button, and signing the T SAFE agreement.
How do I invest in tech startups?
Digital crowdfunding platforms have made it easier for tech entrepreneurs to connect with potential investors.
Tyke Invest offers this opportunity by letting the common people invest in FinTech, EdTech, and other areas.
Angel networks are also increasingly interested in EdTech, FinTech, FoodTech, HealthTech, and more areas. They prefer to invest in specific technological niches.
Tech areas, though, are high risk ventures. Understanding of tech knowledge and diversification of risk is advisable to potential investors.
What happens when a startup dissolves?
When the business formally winds up, the assets are liquidated. This means that all the non – cash assets will either be sold or auctioned.
The remaining assets are redistributed amongst the shareholders on the basis of their ownership percentages. This includes cash which comes from liquidation, money kept in banks, and more.
If the company is doing well, shareholders get back their investment (full or part) in exchange for returning their shares (source)
In the case of outstanding debt, the creditor can sue and the shareholders are liable to return the full amount (source).
If the shareholder receives less amount than what s/he invested, capital loss can be claimed in the annual tax. And if there’s a situation of receiving more, then it’s called a gain.
Within the startup ecosystem, the trends are being set by the next economic generation.
The new founders are increasingly millennials, typically trying their hands at running a profitable business after 2 or 3 attempts.
What’s interesting is that the profile of the investor is also transforming to be Millennials and Gen Z; and they aren’t just limiting themselves to real estate.
With quirky financial habits (spending 500 bucks on a cup of coffee) to savvy financial planning (diversifying their assets, trying Crypto and Bitcoin), they’re slowly flocking to safe online platforms for easier investment options.
It makes sense, then, that technological advances attempt to bridge this gap by creating platforms which connect entrepreneurs to investors.
Startup investing in India is undergoing a revolution of connectivity, and it’s for the best