Startup Investment: Is It Worth It?
Warren Buffet, the world’s leading investor, refused to invest in a startup company. Had he invested $100,000 in that company in 1997, it would have grown to around 50 million dollars by 2017! That startup was Amazon!
Why would anyone invest in a startup? A few reasons are listed below:
1. Higher Returns
Investing in startups can be hugely beneficial as the returns (above inflation) are higher than other types of investments. Furthermore, it diversifies your portfolio investments.
The startups you have chosen if, in the future, get recognized in the industry. Then, this recognition acts as a catalyst for your fame too as you are directly related to the organization.
3. Lifetime Savings
Besides receiving returns, the investment is done to secure one’s future. Many investors seek companies who are thriving and expanding in the sector. By investing in startups like other veteran investors, you can collect large chunks of savings that can help to lead the life post-retirement.
4. Create Positive Changes
Green financing is nascent investment type, which is highly prevalent in the sector. Millennials contribute in the startups which envision to bring positive changes in the society. By opting the green financing, you can become a part of the positive societal changes done by the organizations.
5. More of an art
Investing in startups is more of an art and less of science. There is neither a method to this madness, nor a defined college degree to help you learn venture investing. Every deal, experience, and strategy shared in public domain is anecdotal.
What else? Consider this: Other than capital, you can offer TIME! In other investments such as public equities or real estate where you cannot influence an outcome, venture investing is a people business. So if you like meeting, working, and helping people, then your chance of success is very high. With early-stage startups as a lead investor, you can work closely with founders to create a positive outcome.
Investing is the process of putting money into various physical or abstracted assets with the expectation of making a profit. One can expect to make a profit on the money invested by seeing an increase in the value of the asset — whether real or perceived — and selling off the asset at the increased value. When you invest in a company — public or private — you invest in the asset, i.e., the company itself, and you get a part of the ownership of the company. As the value of the company increases, so does the profit you can make by selling off your stake. A key difference between investing in public companies and private ones like startups is that in public companies, selling off your stake is much easier and near instantaneous. The same cannot be said about private investments — hence it is one of the most illiquid asset classes. It can give you huge profits, but those profits will be only on paper for the most part as realising an exit takes a lot of time. It is an illiquid investment. One basic fundamental that every early stage investor should know is that startups follow the law of power: Only a small percent of the startups you invest in will give you the majority of your profits (research says 6% of your investments will give you 90% of your returns). The rest of your investments may or may not materialise significant returns for you. If you invest in few startups, it is like buying lottery. It is the portfolio approach which helps the early-stage investor create mega returns.
So, are startups a good investment?
Startups are high risk and high return investments, which follow the power of law. It is not about the number of hits you have, but the magnitude of those hits. That is where we find the answer to our question. The wealth creation opportunity that startup investments provide is nearly unparalleled. But it is also extremely risky, and conditional.
It is a good idea to invest in startups when one has the appetite and the capacity for the high risk involved. An investor with a mission to give first, help founders, and build business will win this game. Caution: Money invested here must be thought of as a sunk cost. The investor must be patient. The best companies can give returns only after 10 years. Startup investments can also provide disproportionate wealth creation opportunities. Hence before investing in startups, every investor should ask themselves: Am I ready to take on the capital risk? Do I have the required time and effort to build a portfolio? And finally: Do I have the patience to wait for the disproportionate return?
To gain access to the top startups, one has to put in time and effort to become a part of the startup ecosystem, become a part of various investor networks, and collaborating with other lead investors and VC firms. Time and research are essential.
How to invest?
Investing in the startups does not require any mantra; the only thing you require is knowledge of the business ecosystem. To effectively learn to invest, some tips from experts:
1. Investing Platforms
Investing has become a lot easier unlike years ago. On the Internet, you can find various genuine investing platforms, wherein startups introduce their business outline and seek investors.
2. Personal Connections
Besides reliance on the investing platforms, you can visit networking events or help your personal connections who are planning to start their own ventures. By endowing money to known contacts for the business is a safer investment.
3. Register on AngelList India
For a better knowhow and expertise for a sound investment decision, you can register yourself at AngelList India and begin trailing veteran investors. This will help you apprehend the market and build good connections in the industry.
But whatever you decide, your experience will be your best and long-term teacher.
Angel Investors are those people who have high net-worth with investment resources to support and drive new-stage startups. They turned themselves into Angel Investors by helping young entrepreneurs to scale their market. These angel investors not only provide guidance but also help new startups to connect with the right people in the industry. They play an important role in locating new talent and opportunities for the growth of new startups.
11 reasons angel investors choose to invest in startups
There are numerous reasons but there are 11 that stand out.
1. Killer opportunity
Startups that spot an addressable market that can be exploited or disrupted, with lucrative results, have greater chances of securing investment. Often the shrewdest angel investors are those who spot a winning market opportunity that others have overlooked.
2. Alluring management team
When the people driving the business are clearly going places, angels find the attraction to invest hard to resist. Integrity is a key factor. Are the founders trustworthy? Are they giving the investor the full story about their aims, credibility, and intentions?
3. Business is scalable
For a strong return on investment, sophisticated investors are looking for signs of major sales growth on minor incremental costs. The true test of scalability is whether or not real customers in significant numbers will pay the full price for the product or service.
4. Built around a solid business model
The methodology of how the startup will fulfil the potential of its idea is critical. A realistic, workable approach to attracting and converting the customers needed to grow and succeed is a big tick for any investor.
5. Numbers look good
‘Good’ to an investor means evidence-based, realistic, and robustly tested. If the calculations are attractive and feasible given the detailed research and data supporting them, investment may follow.
6. Wheels are already in motion
Evidence of a product making traction in its target market boosts angel confidence. Has anyone actually bought the product yet? Is anticipation of its launch building? Momentum is a powerful force for investors as it is a great indication of customer confidence.
Some battle-hardened entrepreneurs believe there is never a bad time to start a business. Others are more pragmatic, and keenly follow trends and wider economic conditions before they make their move. When a product arises that is perfectly in-tune with the backdrop conditions, and everything is in place to roll it out to the masses quickly, investors will emerge.
Adding startups to a portfolio gives investors a more diverse mix of investments as investments into 10 startups could quite easily be in 10 completely different sectors.
9. Adrenalin rush
While some angel investors remain in the background as their investment grows in value, others want a piece of the action. Although tough, growing a startup is an adventure that many investors love being part of because startups give them an opportunity to actively influence the outcome of their investment.
10. Making a difference
Impact investing, backing projects that have a positive influence socially or environmentally, is growing rapidly around the world. Increasingly, business angels are looking to invest in ideas and innovations which challenge the world’s problems while also delivering a financial return.
11. Potential payback
Smart investors usually invest in startups as part of a balanced portfolio. They take on board its risks, such as loss of capital, dilution of their share and illiquidity, primarily because of the potential returns.
Top 10 Angel Investors in India with a thumbnail sketch
Rajan Anandan is one of the most active angel investors in India. He is Managing Director of Google India and graduated from MIT. Rajan is also the co-founder of Blue Ocean Ventures.
Anupam Mittal is the founder and CEO of the People Group. The name behind the revolution of the Indian arranged marriage market is Anupam Mittal, through Shaadi.com. Anupam Mittal’s portfolio has grown over the past several years with more than 50 startups along with the highly profitable startup of Ola Cabs.
Anand Ladsariya is the founder and CEO of Everest Flavors. He earned a high status in the Indian chemical market and dominated the Mumbai Angels and Indian Angel Network. He has a strong team of entrepreneurs to make decisions about investing in startups. He has made a portfolio of investments in more than 90 startups. He is an acclaimed angel investor with a long menu of investments.
Sanjay Mehta is the founder and CEO of MAA Intelligence. He is an active member of Venture Nursery, Indian Angel Network, and Mumbai Angel Network Group. His area of interest is social, dynamic, analytics, and cloud with a big stake in technology. Before looking for exits, he confirms he will fund gradually in any startup for 5–7 years and advises them on PR, advertising, branding, and marketing to build strong relationships within the community.
Ratan Tata is the chairman of the Tata Group of Industries and is one of the leading angel investors who invested in many startups. He has encouraged many startups through his investments. He is considered as one of the professional members in the angel investment community due to his investment in many successful startups such as Xiaomi, Urban Clap, Moglix, and Snapdeal.
Amit is strongly involved in funding in the early-stage startups in India with over 20 years of experience in the technology and internet industry. Amit started his entire online product portfolio with the position of Chief Product Officer in MakeMyTrip. He was also part of the administration team that guided the firm to the public.
Vijay Shekhar Sharma
Vijay Shekhar Sharma is the CEO of the most used online wallet Paytm. He is an angel investor who searches for an opportunity to invest. He is passionate about supporting new startups and businesses.
Sachin Bansal worked in Amazon.com until 2006. He founded an e-commerce company Flipkart after leaving Amazon in 2007. His role as an angel investor is no matter of surprise as he also faced a similar stage of struggling for investment. He has invested in more than 14 startups and new businesses. Sachin Bansal may be the hand you need if you are also looking for an approach to make your dream come true.
Kunal Bahl is the co-founder of India’s largest couponing company Jasper, which is operated by Snapdeal. It is India’s largest group buying portal in India.
Naveen Tiwari is the founder and CEO of InMobi. His philosophy of constant innovation and division is strongly rooted in the blood of the Inmobians. He unlocked the true potential of the mobile ecosystem and advertising for a true consumer.
In conclusion, when you have the desire to come up with a startup, don’t just look at it from your point of view as the inventor—look at it from a third person’s perspective: is it something you’d like to spend on your own, either through investing in it or by buying the product/service?
Answer those questions, and you’re good to go.