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Risks and rewards around start-ups investment in India

Tyke Editorial Team by Tyke Editorial Team
August 26, 2022
Reading Time: 6 mins read
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Risk and rewards around startup investment
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The term Startup as a whole has become synonymous with innovation, growth, entrepreneurial spirit, vision, and the ideal approach to the future our country needs at the moment. Along with this term always there are risks and rewards around start-ups revolving. There is no hard and fast rule as to which company constitutes a start-up, but the term would be used when a venture is in its initial 7 years. Start-ups can work in both the product domain as well as in the services sector. It could take an existing idea and add to it or come up with an entirely new one. But the start-up scenario in India reveals many benefits to being an entrepreneur in this day and age. The success rate of start-ups in India showcases why entrepreneurs are willing to take the risks required of them.

India has the 3rd largest start-up ecosystem in the world, after the US and China. Most Indian start-ups see their valuations rise quickly. By 2025, India is expected to have 62,000 start-ups, including 100 unicorns, according to TiE-Delhi and Zinnov, cited by Mint. And the combined valuation of India’s start-ups is expected to reach $1 trillion in 2025. The digital economy is also seeing sizable growth in India. The fast adoption of online services in the wake of COVID-19 has been a boon to India’s start-ups. Thus the start-up scenario in India looks promising due to the rising confidence of investors, which results in more cash flow for start-ups, improved technological advancements, and increased internet penetration in the country. Along with the increasing usage of smartphones and promising schemes being started by the government to push forward and support the start-up wave in the country. This makes all the risks entrepreneurs take seem worth it.

Successful entrepreneurs in the field can’t stress enough the importance of start-ups in bridging the gaps in development that India is currently facing. India has a mixed economy, so it is vital to focus on developing the Indian economy to facilitate the nation’s and its citizen’s growth. Being self-sustainable as a country is the most efficient way to create; here is where start-ups come in and play a crucial role.

Importance of the start-up ecosystem in India

In underdeveloped countries, start-ups present the most significant opportunities offering untapped problems which can be taken advantage of to make profits or generate employment but to make a positive impact. This is why entrepreneurs risk even failure to start their own business. Start-ups play a significant role in establishing economic prosperity in a country as they are the centers of innovation and generate jobs that lead to a better economy. Start-ups also have direct impacts on the cities where they begin. They transform employment patterns leading to the relocation of people for job opportunities. In addition, start-ups lead to the creation of new industries over time and, when they go public, become money-making engines for everyone from the employees to investors, thus making being an entrepreneur worth the risk.

Research has revealed that India needs more than 100 million jobs annually, and start-ups are a way to employ individuals. More jobs and income are generated, thereby improving the country’s economy. More money leads to circulation in the economy when people spend it improving the government’s revenue. Although the government has initiated many schemes to improve the business environment revolving around the start-up ecosystem in the country, investing plays a massive role in offering funds to start-ups. The government has pushed for an innovative plan, ‘Startup India,’ to assist the budding entrepreneurs they feel have the potential to grow and succeed, thus helping entrepreneurs balance their risks. A positive result of this plan will eventually lead to a better economy.

How to invest in Indian start-ups? Has always been a tricky business considering these are newly born innovations still in the process of transforming and evolving themselves. We cannot predict whether the invention will succeed or not. Thus it is essential to evaluate the risks and rewards of start-up investment in India. But considering the vital role start-ups play in improving the economy and livelihood of the people of this country, they must be given a chance, and entrepreneurs can experience the risks and rewards that come with being a part of the start-up ecosystem.

Angel Investors are the ones who provide the seed capital to start-ups, that is, provide funding when the start-up is merely an idea. They give the money required for the idea to grow into a fully-fledged physical existence. They work at a high-risk level. The other kinds of investors include anchor investors, bridge investors, or individuals with a high net worth who jump in later to invest when the start-up has already begun to grow. They carry fewer risks concerning investing as they bid on start-ups that have the potential to grow and thus know what they’re getting into.

Start-ups will eventually represent the future of India’s corporate sector. Thus, investing in them will lead to a high yield return in the long run if given proper capital requirements and managed efficiently. There are many rewards to investing in the start-up ecosystem in India, which can be found on

Rewards around investing in start-ups in India

  1. Although investing early carries a large amount of risk, it also allows the investor to have a massive amount of leverage over how the start-up functions from the beginning of its growth journey. Simply by providing seed capital at an initial stage, they get partial ownership over the company letting the investors have more say over which direction the start-up should head.
  2. With the government being incredibly supportive of the start-up ecosystem in India, people who invest in start-ups will also greatly benefit from government schemes centered around helping entrepreneurs, start-ups as a whole, and those who invest in them. In addition, investors are also being provided exemptions on the filing of tax returns, sometimes of 100%, which leads to the generation of a tremendous amount of profit.
  3. Incubation centers developed in the company, with the sole focus being to cater to start-ups forming in the nation and provide infrastructural benefits to the new companies, which will boost the investor’s faith in the company. Investors who have invested in companies that have innovative ideas that stand out gain fame and acclaim, showcasing that they are aiding in the development of the country’s economy.
  4. Encouraging Indian investors to invest in foreign companies leads to a back and forth mutual investing by foreign investors in Indian companies leading to more returns for Indian start-ups, which will help them expand their business in an international sphere.

The Risks of investing in start-ups in India

  1. As an investor, although there are many benefits to buying an equity stake in the company or lending it money at an early stage, the risks that entrepreneurs, as well as investors, face have also gotten sharper and broader. With the number of innovative ideas and new start-ups forming in the country at a very rapid pace as an investor, it is hazardous to invest in them without knowing where they may go in the future. Having insight into the future is tricky and challenging to achieve in this economy. Trusting your gut instinct as an investor and having faith in the company is not enough to guarantee that the start-up will succeed. So it is important to understand the risks and rewards around start-ups.
  2. The current start-up ecosystem also requires investors to familiarize themselves with the nuances of the business they’re investing in in lowering their risk outcomes. It is difficult to understand the dynamics of a business idea that will most likely be very new in this age.
  3. Although you may believe in the idea of being concrete as an investor, its execution may not always find footing. Therefore investors risk losing their money in a mirage of an idea that could have been successful but won’t due to poor execution. Furthermore, at an early stage of investing, this isn’t something that an investor can ever predict or control. Therefore there are no guarantees that a fledgling start-up will succeed; if it fails, an investor may walk away with nothing.

Things to keep in mind before diving into an investment opportunity

Before diving headfirst into an angel investment or investing in a start-up through a crowdfunding platform, there are questions that every investor must ask themselves. Before you hand your money to a start-up, you must understand the level of involvement and risks and rewards around start-ups investment in India. As an angel investor, you will see yourself having much more control while investing through a crowdfunding platform the level of power will be far lesser.

As an investor, you must realize start-up crowdfunding in India and the timeframe before the company starts to see returns so you can calculate your profit margins accordingly. One way to check if the investors will realize profits sooner or later is by checking if the start-up is spending money at a very high rate at its initial stage; in such a case, the company will realize profits at a much later time and investors can plan accordingly.
Investors must check when and where they can withdraw their investments. This is why knowing the time frame you’ll be involved in is essential to understand if you can exit at a comfortable stage.

The bottom line is that investing in start-ups is an excellent opportunity for investors to expand their portfolio, contribute to a company’s success, and aid in improving the country’s economy. Still, it is not foolproof and not without risks that both entrepreneurs and investors face. Therefore investors need to assess every opportunity very minutely. Taking the time to do due diligence and checking the start-up timeframe accurately is something investors cannot afford to skip.

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Tyke Editorial Team

Tyke Editorial Team

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