It’s an exciting time to be a small investor in India. Times have changed, and so has the traditional mindset of doing business and earning well, and investing in a business is no exception. Moreover, the current trend sees new companies, also called startups growing exponentially toward the golden target – becoming a unicorn in the business world.
So how can small investors ride the startup wave and start investing in startups?
Who are the small investors?
An investor is a person who makes investments in companies to make a profit on the money invested. An investor’s primary gain would be to maximize profit and minimize their risks. As opposed to this, some Speculators are willing to invest in riskier projects to make higher gains.
Small investing is buying a small stake in a business through equity or lending. Small investors traditionally bought shares in listed companies, and the adventurous ones would also buy penny stocks in the hopes of picking the right ones. Investing in high-performing and well-rated listed companies is the safest choice for small investors. But lately, small investors have shown interest in investing in promising startups.
What are Startups?
Startups are businesses created based on innovative ideas or a business plan that identifies an existing need and seeks to fulfill it. Startups usually have a fresh and innovative perspective on their product and market and how they would create a new commodity or meet an existing need. They also have immense growth potential spearheaded by founders who are interested and passionate individuals or teams driven by their dream.
Some of the most exciting startup stories have been of Facebook, Uber, Canva, and others. What such startups have in common -is the right product at the right time by the right team of people. Of course, not every startup makes it big, but there are some that outperform everyone’s expectations.
How can small investors put money into startups?
Traditionally, new businesses could only go to banks to obtain funds for their business idea or proposal. Now with the advent of Venture capitalists, Angel investing, and Crowdfunding – the scenario offers broader prospects for businesses raising funds to build and grow. It has also opened doors to small investors who can and are willing to invest in startups.
Several companies scope out and understand the business, the functioning, the management, and the viability of startups and then create a platform that allows small investors to invest in these startups. Angel Bay, Faad Network, Inflection Point Ventures, and Republic are some of these companies. For small investors, Angel Investing is the way to go if they want to invest in startups.
What is Angel Investing?
Angel Investing is a term where small investors and high net-worth individuals(HNI’s) invest in a new business. Angel Investing companies such as Angel Bay – allow small investors to buy into startups for a nominal amount. Angel buy has a minimum investment amount of 5 lakhs to a maximum of 1 crore. Induction into such a group is based on referrals only. So small investors looking to invest in startups should ask their friends, family, and colleagues who could be investing already. This is the direct investment option.
Small investors can also take the indirect investment option by asking their financial advisor about such possibilities. Some angel funds thoroughly vet the business before offering it as an option to their subscribers.
They look into
- the business idea – how unique it is, its viability, existing competition In the market
- the founders – their credentials, their past performance, how committed they are, their vision for the company, their strengths, and weaknesses
- the potential market size of the business – its viability, what kind of demand it can hope to get, it’s turnover potential
- the profitability of the company and if it can sustain growth and profit both
What benefits of investing in a startup?
If you decide that it is for you, then there are many benefits to investing in a startup. Some of these are
- You can evaluate which niche business or mainstream business you want to invest in and pick your own investment strategy. Often startup companies bring in change into lives, and you get to be a part of the change.
- Startup companies that succeed can help small investors multiply their investments and offer multifold returns too.
- Small investors can do this while working on their main job. Small investors may not use their safe investments to invest in startups, which can be a profitable and exciting side hustle despite the risks.
Disadvantages of investing in a startup?
With all the excitement and buzz around investment in startups, a small investor must also keep in mind the flip side of investing in startups, which are:
- Startups are built around ideas that are scaled up substantially. Unfortunately, these are not companies with a laid-down track record; hence, the business could go either way. So small investors risk losing their investment if the business fails.
- Start-up investment does have exit avenues, but it is an investment that stays illiquid till the next round of fundraising happens, and buybacks are offered.
There is the traditional mindset and the modern mindset to doing things. Being a startup investor means combining a contemporary perspective with conventional wisdom. So small investors can build on their knowledge and ability to understand the business and investment avenues startups offer.
For the informed and interested investor, the world truly is your oyster, and you can fund your dream and someone else’s by being a startup investor.