“Startup” is the current buzzword in India. Individuals now are more eager to be entrepreneurs in contrast to the preceding two decades, when people sought a stable job. Today, especially in India, everyone wants to establish their own business and become a rising entrepreneur. If you are an entrepreneur as well, this guide on how to invest in startups in India is perfect for you.
What is a Startup?
A “startup” is any new company starting its business operations. Startup businesses are started by entrepreneurs who want to offer innovative products or services. One or more entrepreneurs often start a small business with a limited budget to develop and promote a novel product or service. Startups are frequently linked with technology, although they can exist in any field.
With the youngest population in the world and a rapidly expanding economy, India is one of the fastest-growing countries in the world. As a result, India has been an attractive startup hub since the country’s continued growth is supportive of entrepreneurs.
Some of the world’s most successful startups have been founded by Indian entrepreneurs due to their novelty and disruptive nature. The Indian market has seen unprecedented investment from top-class investors looking for investment opportunities in late-stage and growth-stage startups for investment opportunities.Even early-stage ventures that receive some exposure have attracted major investors thanks to the rising confidence in Indian entrepreneurs.
What Exactly Is Startup Funding?
To understand how to invest in startups in India, you must first learn about startup funding. Funding is what a company needs to start and run its operations. Investments in a company are made for product development, manufacturing, expansion, sales and marketing, office space, and inventory. In many cases, startups are self-funded (to prevent debt and equity dilution) instead of raising funding from third parties. Nevertheless, most startups do raise funding as they grow and scale their operations.
Several sources of funding are available for startups, including angel investors, venture capitalists, government grants, crowdfunding, and private loans. The advantages of each option vary, such as the potential for high returns or access to valuable industry contacts. Each funding source has its own terms, including interest rates, equity stakes, repayment terms, etc.
Depending on the business idea, the product, the market opportunity, and the team’s skills and experience, startups require varying amounts of funding. Before raising funding, business plans, financial forecasts, and strategies for how startups plan to use the money should be developed by the owners. Additionally, it’s imperative to research and understand the different funding options and risks involved.
Types of Startup Investors
Listed below are the types of startup investors. Going through these will give you a better idea of how to invest in startups in India.
1. Bootstrapping
In this type, an entrepreneur begins a business with minimal cash and relies on funds other than outside financing. Individuals attempting to create and develop a firm using personal funds or the new company’s operational income are said to be “bootstrapping.”
2.Friends and Family
This is, as the name suggests, the amount borrowed by founders from their families and friends to be invested in the budding startup. These funds are usually treated as loans and repaid with interest to their beneficiaries.
3. Government Grants
These are the grants given by the government as an aid to budding startups working in a particular field, which the government notifies from time to time.
4. Angel Investors
Typically, angel investors are wealthy individuals or retired executives who invest in other people’s businesses. Often, they are experts in their field who provide experience, contacts, and technical and managerial knowledge as well. It is common for angel investors to fund the early stages of a business with investments. By risking their money, these investors reserve the right to supervise the company’s management. Typically, this involves a seat on the board and assurances of transparency.
5. Business Incubators
Startup businesses at various stages of development are usually supported by business incubators (or accelerators). Additionally, local economic development incubators help create jobs, revitalize regions, and provide hosting and sharing services. Many incubators offer future startup businesses access to their facilities and administrative, logistical, and technical capabilities. By sharing its laboratories, an incubator might enable a new business to test and develop its products more cost-effectively before going into production. It usually takes two to four years for an idea to be incubated. Usually, an incubator’s business leaves its premises once its product is ready to be produced on an industrial scale.
6. Government Loans
Government loans are funds made available to entrepreneurs by a government agency to help them start or expand their businesses. These loans often have lower interest rates than standard bank loans and may include additional benefits such as tax breaks or cheaper fees.
7. Crowdfunding
Crowdfunding is a method of raising money from a large group of people via online platforms. Startups typically use it to raise funds from a large number of people in exchange for a reward or equity in the company.
8. Venture Debt
An investor-backed startup is supported by “venture debt,” which is a general term for loans that are specifically designed to provide support to the startup. Entrepreneurial startups usually use venture debt to finance their products and services in the fields of technology, life science, and other inventive economies. Instead of startups borrowing money from friends and family, it targets small startups with venture capital backing.
9. Venture Capital
An investor provides venture capital to a company at the start of its development that shows great potential for growth over the long term. An experienced investor who has invested in startups for a long time (10 years) typically provides venture capital. Their investments are generally in the form of money, but they also offer founders valuable management and technical advice.
Advantages of Investing in a Startup
There are many advantages to investing in a startup, such as the following:
High Reward, High Risk
Startup businesses often receive investments in their early stages because of their great potential for future growth. If an entrepreneur succeeds, the investment could grow significantly over the next few years.
Passive Income
Most angel investors view startup financing as a side business they may use to supplement their income. The constant innovation and enthusiasm of the startup ecosystem provide an excellent outlet for spending your free time researching and making investments in firms.
Diversification
An investor can spread their portfolio risk by investing in startups. In addition, unlisted shares reduce portfolio unsystematic risk because startup returns are less dependent on market movements, so negative shocks to the market have less impact on the portfolio.
Disadvantages of Investing in a Startup
Let’s understand the risks involved with startup investments under the following sub-topics:
Speculative Investment
The workforce and business strategy may not be as reliable as those of more established companies because startup investments are made so early in the company’s development. If the startup fails, there is a considerable probability that you will lose your funds.
The Volatility Is High
A startup’s initial years are incredibly unpredictable, both monetarily and in terms of its founders, staff, other backers, market circumstances, competitors, etc. Consequently, investment always entails a high level of risk and unpredictability.
Liquidity Concerns
The average investment period in a startup is 8 to 9 years. This makes it a very illiquid investment and may not be suitable if an urgent need for money arises.
FAQs on How to Invest in Startups in India
The frequently asked questions on how to invest in startups in India are given below:
Why do startups need funding?
Startups need funding to realize their ideas and formulate further plans for growth and expansion. In addition, it facilitates the building of networks for founders.
What things should you remember when investing in a startup?
Before investing in a startup, investors consider the following factors: market volume, team capacity, execution, investor compatibility, competitive edge, and a distinct business plan.
Why do startups fail?
There are numerous reasons why startups fail, most of which can be avoided. This is because not all entrepreneurs create products that the market requires or wants to reward financially. Other concerns include a lack of funds, inadequate team management, poor marketing, higher prices, or more competitive competitors.
What are some of the popular sources of startup financing?
Angel investors, bootstrapping, government loans, venture debt funds, incubators, and venture capital funds are popular sources of startup financing.
Conclusion
Now, it’s understandable that startup financing is a highly profitable investment strategy if done smartly. There are so many sources to get funding in India that sometimes startup owners get confused. The best advice on “How to Invest in Startups in India?” is to invest after a risk assessment and proper market research. Ensure that the product or service you invest in is good enough to create a ripple before nosediving into the market.