Thinking of spending your spare money wisely; seems investing is the only suitable option. Then, I would suggest, from all the varied options, investing in an aspiring startup sounds quite promising. By backing a startup, you not only join the circle of India’s highly developed, but also become a part of a brighter future.
But, what really is a startup? How to invest in Indian Startups?
Usually speaking, a startup is a young company established by one or more entrepreneurs to seek, develop & validate a scalable business model.
To understand better, let us look at an example of how Nykaa – a multi cosmetic junction became a leading fashion, cosmetic brand bridging the gap between customers’ need for cosmetics of different brands at one place along with other categories like clothing, accessories and more.
To understand how to invest in Indian startups, we have to understand why the startup needs money?
The reasons for startups to have money :
Starting a business requires a huge amount of capital and resources because startups aim to be hyper-growth businesses. The only way they can accomplish this is through external sources of capital, and most often, this is from the outside.
A founder’s personal money is not the only source of capital for the business. External sources are those used for running the business. Capital is what companies and individuals invest for growth and stake in the business.
As a result, investors make investments in companies based on the belief in the business and help the founders realize their dreams by providing them with money and other resources. Investment returns provide the external investors with ownership of the company (stocks) and interest (if they received a loan). Investors are rewarded for their participation in the business.
Here is, How to invest in Indian startups?
In early stage startups
By investing in early-stage startups, investors hope to take advantage of their potential value before they become public or receive venture capital funding. Investing in a startup all comes down to having confidence in its founders and their ability to build a successful company.
Ways to invest –
1. Venture Capital
The term Venture Capital (VC) refers to a type of private equity that is given to startups that have long-term growth potential. Investors pool their money to create these professionally managed funds and invest in promising startups. Emerging companies looking forward to future success or existing ones seeking expansion are turning to it as their go-to source.
The business plan that you submit to secure venture capital investments should include the same type of information that angel investors are looking for. The due diligence process begins after an introductory meeting with venture capitalists to explain the business proposal. To determine if a business is suitable for investment, venture capitalists ask a series of questions. Venture capitalists offer a term sheet after completing a legal review, which is the basis for an investment agreement.
2. Angel Investor
Generally, angel investors invest in companies in exchange for equity stakes in those companies. These investments are high-risk, high-return investments. To make a profit, investors are looking for startups with high growth potential.
However, this term encompasses a vast range of investors. An investor could offer funding as a one-time investment or as-needed. It is possible for investors to be involved in the startup’s operation or remain in the background. Some specialize in work within a particular field or in businesses in a specific location. Even a friend or relative who is exceptionally wealthy can become an angel investor.
An incredibly wide network of people can contribute to crowdfunding via contributions trickling in from start-ups, projects, and other ventures. Fundraising can be an effective strategy for securing investors.
In addition to business people and investors, this model is also suitable for friends, family, customers, and shareholders. There are many online crowdfunding platforms available in India for startups and growing businesses like Kickstarter, Ketto, Milaap, Wishberry, InnoPitch, Crowdera, GoFundMe, etc.
In seed stage
Startups receive their first round of funding from seed money or seed capital. Sources of seed financing include angel investors, friends, family, and the original founders of the company. The main reason why angel investors prefer seed funding is that it allows them to acquire ownership of a company at its lowest point in its development.
Founders, angel investors, and close friends and relatives of a company are first sold stakes or shares. The Series A preferred stock then becomes available for sale to investors.
As a retailer, you have basic two ways by which you can invest in a startup: Direct and Indirect Investment.
Direct Investment – It is possible for an investor to invest directly in a startup without the assistance of a third party like a VC firm, bank, or private equity firm. Angel investment falls under a direct investment category.
Indirect Investment – When an indirect investment is made, an individual or firm can invest first through a VC/debt/private equity firm, and then through PE firms. Money raised through investors like you is used in this process.
Things to keep in mind before investing
Ideation – An individual presents a solution to a major problem with a small sample text; the problem becomes a reality with the validation of a small sample text. It is imperative to understand the idea involved in starting a new business before you put money into it, looking from the perspective of the audience and the future.
Creator – It is critical to be in touch with the creator as the execution is carried forward by his vision. As investing in a startup involves investing in an idea, make sure you have a proper conversation with the founder.
Competitor – It is very important to see who are the competitors, by product as well by the way of market. A complete study to understand the way they are engaged in promoting their startup, how they have created their space and what is their current strategy to sustain the competition.
Industry Perimeter – Industrial perimeter and target audience is one major factors. When you invest in a startup, make sure to look it has good potential for being big in the future. A business restricted to a particular locality or cannot be called not called a startup. The operation of a startup spreads on a massive scale to achieve a dominant status in the market.
To conclude, it is safe to say that investing in Indian startup is like taking an adventure. There may be ups and downs, and tides opposing your sail, but if you hold on, share the wisdom you have with the sailor, you will set to achieve the goal you had in your mind.