A startup can be defined in any number of different ways, and you will find numerous guides on the internet on how to invest in startups in India. Typically, a business will try to disrupt the status quo by developing a novel product or expanding an existing service in order to address a significant issue. For instance, Uber developed an app to link passengers and taxi drivers, a concept that upended the conventional method of calling a cab. This effectively and creatively resolved the issue for both parties involved.
However, the actual product or service (although it may) does not distinguish a normal or traditional company from a startup; rather, it is how they both operate. A traditional business scales through organic growth strategies at a very linear rate and is typically profitable from day one. However, a startup grows extremely quickly with the aid of significant amounts of funding and resources and, as a result, may not even be profitable until a few years after going into business. The main distinction between a startup and all the other types of businesses out there is the stark difference in the focus of the two types of businesses.
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For instance, Facebook grew to be one of the biggest companies in the world in less than ten years, but other companies that have been around for two to three decades still haven’t grown to the same size as Facebook.
The success of a startup obviously depends on the idea being implemented, but the same idea can be carried out with either a startup mindset or a traditional business mindset. If you are looking for a complete guide on how to invest in startups in India, then you are at the right place.
Why do startups need money and you should know how to invest in startups in India?
Startups are businesses that operate with a hyper-growth mindset, as was stated in the section before this one. They obviously require enormous amounts of funding and resources to accomplish the same, which must typically come from outside sources. External sources refer to the fact that a company’s operating capital comes from sources other than the founders or directors of the company, as well as from individuals and organizations outside the company.
These people and companies support invest in startups in India financially and with other resources because they have faith in the idea and want to see the venture succeed. In exchange, they receive shares in the business (in the case of stocks) or interest on the loan amount (in the case of loans). These act as inducements for people invest in startups in India.
Startup’s Life Cycle of Funding before you search how to invest in startups in India
Throughout its existence, a startup will raise money in several rounds from various sources and for a variety of purposes. The two main categories of capital are equity and debt capital.
| Type of Investment | Angel Investment | Venture Capital | Venture Debt | Private Equity |
| Stage | Idea Stage | Prototype Stage to Growth Stage | Growth Stage | Growth Stage to Pre-IPO Stage |
| Profile of Investors | Friends, family and HNIs | VC firms deploying capital of HNIs, Family offices, Pension funds, etc | Debt funds deploying capital of Insurance companies, pension funds, MNCs, etc | PE firms deploying capital of hedge funds, large MNCs, pension funds, etc |
| Holding Period | 4-5 years | 8-10 years | 1-3 years | 5-8 years |
| Exit Event | Institutional Capital Raised Event | Acquisition or IPO of the startup | No exit event needed | Acquisition or IPO of the startup |
| Risks | Very High Risk – Reward Ratio | High Risk – Reward Ratio | Moderate Risk – Reward Ratio | Moderate Risk – Reward Ratio |
In an ideal world, when a startup is acquired by another business or launches an Initial Public Offering (IPO) on the stock market, all equity investors are These kinds of things are referred to as “exits” in the startup ecosystem.
On the other hand, a debt investment has its own schedule for repayment and is typically not reliant on an “exit” taking place. So a good guide on how to invest in startups is very important for the investor.
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How Can Small-Scale Investors invest in startups?
A retail investor can take part in each of these various investment opportunities throughout a startup’s entire life cycle. Two additional categories can be made from the investments:
- Direct Investment – In this scenario, the investor makes an investment in the startup directly, without the assistance of a VC, debt, or private equity firm. Angel investing typically involves direct investment.
- Indirect Investment – In this scenario, the investor invests in a VC/debt/private equity firm, and the PE firms, using the funds they have raised from investors like you, invest in various startups.
Following are the steps to invest in startups:
a. To make an investment using the indirect option, get in touch with your financial or investment advisor. He or she will conduct research, compile a list, and provide you with profiles of every organization currently seeking funding.
b. Review the various choices and base your choice on elements like:
- Asset class type
- intended returns
- The fund’s primary area of focus (sector, theme, market, etc.)
- holding time
- the fund manager’s qualifications
- previous performance
c. You can now schedule a call with the fund representative to discuss the matter further and to get any questions answered. Before you can actually give your money to the fund, there will typically be some paperwork to complete.
Things to Keep in Mind Before investing in startups
Before investing in a startup, there are a hundred considerations that could be made; however, the following are the top ones that should be on your list at all times:
- Idea: In most cases, a startup investment is just an idea that has been tested on a small sample to ensure its viability. Therefore, it is crucial to fully comprehend the concept and the business before investing.
- Founders – As a startup investor with little external validation to rely on, the founders are the most crucial individuals. The decision-making is in the hands of the founders, and in a sense, as a startup investor, you are funding both the concept and the individuals who will be carrying it out.
- Market Size – A startup needs to serve a sizable enough market to have a good chance of becoming successful in the future in order to provide you with a good return on your investment. Since startups operate on a massive scale in their quest to become dominant, a company that only serves a specific locality or a small area should never be referred to as a startup.
- Competitors – For startups, becoming the market leader and scaling up at an exponential rate are the two main goals. As a result, it is crucial to be aware of the existing competitors in the market so that the business you may be considering investing in can develop effective defenses against them.
How Much Money Can You Put Into invest in startups?
Any individual, whether Indian, foreign, or NRI, may invest in venture capital, debt, or private equity fund as long as they have the required minimum amount of funds on hand.
An individual investing in any of the aforementioned instruments must invest a minimum of INR 1 crore.
In contrast, angel investment is solely contingent on your direct agreement with the startup you wish to support and has no minimum investment requirement. You should be clear with the amount before going on the step of how to invest in startups in India.
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Should You Make an invest in startups?
Advantages
- A startup investment is typically made when the business is young and has a lot of potentials to grow into the next big thing. This is because these investments typically have high reward potential. Therefore, if you catch the right bird early enough, your investment may grow exponentially within a few years.
- Change-maker – When investing in startups, you frequently back concepts and ventures that have the potential to improve society. As a result, it offers a great chance for individuals to contribute to improving the world.
- Angel Investing as a Side Hustle: Many angel investors actually view startup investing as a side job that allows them to supplement their income. It becomes a great opportunity to use your extra time to research and invest in startups because of the excitement and innovation that are constantly occurring in the startup ecosystem.
Disadvantages
- High-Risk Investment – Because startup investments are made at a very early stage, the team and the business model might not always be stable like those of an established business. As a result, there is a significant chance that you will lose your money if the startup fails.
- High Volatility – A startup’s first few years are incredibly unpredictable, not just in terms of finances but also in terms of its founders, teams, other investors, market conditions, rivals, etc. As a result, when you make an investment, there is always a very high level of uncertainty and risk involved from a financial and emotional standpoint.
- Long-holding Periods: The typical holding period for a startup investment is 7-8 years. Because of this, investing in it is very risky and may not be a good idea if you might need the money quickly for an emergency.
Five Methods for Choosing the Best Indian Startups for Investment
Professional Network:
One of the best resources for identifying investment-worthy startups is your current professional and social networks. By doing this, you can get a head start and invest in innovative ideas that have a lot of potentials. Furthermore, it is advantageous if you or a trusted acquaintance can attest to the founders’ business savvy and zeal. Additionally, you should never undervalue the networking potential of your close friends and family. The first investors in any startup are typically people from the close-knit community of friends and family.
Startup Incubators:
Institutions and organizations have created incubators to support startups and assist them in honing their ideas and business models as they emerge from all corners of the nation. By offering pertinent mentorships, counsel, and guidance to help startups in their very early stages develop their core business. You can ask around or conduct in-depth online research to find the best incubators in the nation. Learn more about the startups that are receiving incubation, their goods or services, and the stage that the company is currently in. You can contact the founders directly to inquire about funding options based on your research.
Angel Investing Platforms:
One of the best and most effective ways to find startups to invest in is through angel investing platforms. These platforms give the largely disorganized startup investing sector some structure. On these platforms, information is easily accessible, saving you a lot of time. A key way that each platform differs from the others is in the startup onboarding procedure it uses, as well as the time and effort invested in researching the business and confirming the information provided.
Startup Hackathons:
Hackathons are marathons of idea creation where the most creative and entrepreneurial businesspeople participate in creating a brand-new product. Investors can choose from the ideal pool of ground-breaking startups to invest in by attending or following such Hackathons. Finding quality startups is easy at startup hackathons.
Funding rounds of Venture Capital:
If you are having trouble finding startups to invest in, try finding a seasoned venture capitalist. The capital required for the venture is provided by venture capitalists, who identify startups with a high potential return on investment. They may use their own funds or those of other potential investors. If you have enough money, you can either participate as an investor alongside a venture capitalist or you can directly invest in the funding rounds.
Bottom Line
The startup ecosystem in India is currently in an exciting phase, with transactions and other activities happening at a previously unheard-of rate. Now is a great time for retail investors to invest and reap the rewards of the remarkable success of Indian startups. To be successful, you must exercise caution, just as you would with any other investment, and make sure that you fully understand your investment.
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Hello there, my name is Phulutu, and I am the Head Content Developer at Nivesh Karlo. I have 13 years of experience working in fintech companies. I have worked at Policybazaar, Paytm Money, Investopedia, and others. I love writing about personal finance, investments, mutual funds, and stocks. All the articles I write are based on thorough research and analysis. However, it is highly recommended to note that neither Nivesh Karlo nor I recommend any investment without proper research and read all the documents carefully.
