Investing in Startups in India can be profitable, but they do come with risk. There is no guarantee that a startup company will succeed, and investors could lose everything if it fails. Angel investors, venture capitalists, and those investing via crowdfunding platforms need to ask several key questions before investing in a startups in india.
Below are the 5 Questions to Ask Before Investing in Startups in India
1. What is the necessary level of involvement?
As a start-up grows, so do the responsibilities that go along with investing in it. People who invest in startups through venture capital firms will not have much contact with the team running the company, for instance. Angel investors, however, view things differently.
In angel investments, investors gain an equity stake in the company, which allows them to actively participate in decision-making alongside the startup’s leadership. Compared with an angel investor, someone who funds a startup’s crowdfunding campaign receives equity; however, he or she doesn’t have control over the startup. Finally, when donating money to a startup, it’s important to clarify your expectations.
2. Is there a timeframe?
It takes years for many startups to turn a profit for every overnight success story. A long-term game, investing is a long-term game, but you should have some sense of the timeline so you can compare it to what you personally expect. Depending on the investor, they may be fine waiting ten years before they realize a return, or they may want their money back within five years.
It is easier to estimate the investment horizon of a startup by evaluating its track record. A company’s burn rate can provide insight into the company’s potential. The amount of money spent each month can give insight into the company’s prospects. It could be a sign that investors are going to wait longer to receive a payout if a startup is still in its infancy but the burn rate is extremely high.
3. How much return can be expected from this investment?
In addition to helping entrepreneurs succeed, venture capitalists are often also motivated by the possibility of making money. Analyzing the potential return on investment (ROI) associated with a particular startup is a must for investors who are focused on maximizing earnings. There are various types of investments, so returns vary.
It’s typical for angel investors to expect returns between 30% and 40% annually. On the other hand, venture capitalists are risk-averse and expect a higher return rate. A similar investment strategy is equity crowdfunding, and since it’s still a relatively new investment strategy, it’s hard to set an average return rate.
Keep in mind that investment costs and fees should be considered when calculating returns. Investments in venture capital may involve annual management fees. Fees are also charged by crowdfunding platforms to investors. In general, the more expenses an investment involves, the less return it will generate.
4. In what ways does investment influence diversification?
Having a diverse investment portfolio is the hallmark of a successful investment portfolio, and minimizing risk without curbing returns is the primary objective. Investors must consider how startup investments affect their overall asset mix and risk level when considering startup investments. It can be difficult, however, to strike the right balance between risk and return.
It’s easier to spread risk among asset classes when there are clear distinctions between them. Starting up requires a different mindset because it is more of a hit-or-miss proposition. Investors who invest in more startups are more likely to achieve target returns. In the meantime, putting too much investment money into too many ventures can hurt if there isn’t a standout.
5. Does the exit strategy make sense?
With startups, it is particularly important to have a clearly defined exit strategy in place. The initial investment, as well as any associated gains, should be clearly defined before investors withdraw their money. If an angel investor were to buy equity shares, they would want to know when they’d be able to sell them. It is therefore important to know the timeframe involved to be able to exit at a point you’re comfortable with.
The Bottom Line
For investors, Investing in Startups in India is a great way to diversify their portfolio and contribute to the success of an entrepreneur, however, it is not a foolproof venture. Even though a company may have strong cash flow projections, what looks good on paper may not translate to the real world. A startup investment should be researched thoroughly by investors, as they cannot afford to skip this step.
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