StartupTalky

Tag: Networking Opportunity

  • Risks and Rewards of Startup Investing

    Startups have taken over the business world since the turn of the millennium. The plethora of them that mushroomed across the world have been successful in finding solutions to the slightest of human inconveniences. The startup culture in fact has completely pressed a reset button over the traditional business environment that prevailed. This change has been reflected in the nuances of investments as well.

    Investing in startups is becoming a common affair just like how people used to invest in public markets. Although it is becoming usual, there is absolutely no doubt in the fact that it is a risky walk on the rope. For a startup investment to be successful, it has to pay off well for the investor. At this stage, where only a few startups make excellent profits, it is of utmost importance to be careful while making such investments so as to not lose one’s entire investment at one go.

    The truth is that hardly 10% of startups generally make it to their Initial Public Offering (IPO). Hence the risk associated with it is immensely high as either the investor will become wealthy with returns amounting up to a thousand times the investment or it can be a complete loss. This article will look at some of the risks and rewards of startup investing.

    Rewards of Startup Investing

    Risks of Startup Investing

    How to Invest in Startups in India?

    Rewards of Startup Investing

    In today’s time, when the startup industry is booming, investing in startups can turn out to be a lucrative opportunity. The following are some of the rewards of investing in startups:

    Value of Growth Capital Investment Deals India from 2016 to 2021
    Value of Growth Capital Investment Deals India from 2016 to 2021

    Dynamic Portfolio

    Investing in startups is an excellent way to diversify portfolios to include assets that are of high risk and have higher rewards. Trends of investors show that they invest in multiple startups personally or through a venture capitalist firm to practice diversification. For example, Jeff Bezos has made personal investments and is also actively investing through his venture capitalist firm, Bezos Expeditions in various startups.

    Patterns of investments of those who have earned profits through the process show that they invest in multiple startups rather than investing all the money in a single startup. By diversifying investment, the investor can make multiple profits from various asset classes. It also ensures that one does not sink all of the available capital for a single investment opportunity. Diversifying investments also increases the probability of getting better returns.

    Outsized Returns

    It is true that startup investments are highly risky. But it also means that if the startup ends up doing exceptionally well, it is also highly rewarding. When compared to any other form of investment, an early investment in an innovative startup is the most rewarding one with returns exceeding several times the investment. For example, Peter Thiel was an early private investor of Facebook who invested $500,000 into the firm. Eight years after its launch Facebook offered its IPO after its valuation climbed over $100 billion. Soon after the IPO, Peter Thiel made more than $1 billion.

    On another note, if a person had invested in Facebook on the first day of it in the public market, their share would have been quadrupled by now. In order to assess the probability of getting better returns through startup investing, it is highly important to keep yourself updated about the nuances of venture returns.

    Networking Opportunity

    Startup investment is a great way of building new connections with other investors, founders and stakeholders. It will help in understanding more about the details of investments keeping one along with the latest updates. An investor would probably want to invest in multiple asset classes as the very idea of investing goes by the tagline “Don’t Put All Your Eggs in One Basket”. The networking opportunity provided by every startup investment is thus, a gateway for excellent networking opportunities which can later lead to further investment opportunities.

    Positive Impact on Employment

    Every startup investment that one makes is the beginning of a business which has the potential to change the lives of people. Hence investing in a successful startup indirectly has a positive effect on employment rates. Every small investment made in a startup also benefits the local population thus, reaping not just financial benefits for the investor but also economic benefits for society.

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    Risks of Startup Investing

    There is no doubt in the fact that startup investing is a great opportunity for earning profits. However, the investment may not always turn out to be successful. The following are some of the risks of investing in startups:

    Startup Failure Rate by Time in Business
    Startup Failure Rate by Time in Business

    Unforeseen Complications

    One of the biggest risks of startup investing is the unforeseen complications that might occur in the market. Every startup materialises into a full-fledged business if the ideas are innovative and everything is executed perfectly as planned. Yet, there are chances that things might not work the way it was predicted. The economy is tricky and unpredictable and can come up with hurdles of various intensities.

    In order to ensure that an investor does not run down the path of bankruptcy by investing in a startup, it is vital to make a prudential decision on how much fund should go into each investment. It is always a good idea to have a backup plan in case things do not work out in the planned way. Having a sound understanding of the startups will also help in understanding the reasons why the business crashed.

    Fraudulent Practices

    There is always a chance that people get cheated every time there is money involved. Startup investments are no different. Investing in startups that you don’t know much about can be a dangerous thing. Study deeply about the founders, their backgrounds and their plans. Investing is not a blind isolated act. Be aware of the details of the company that you are investing in, and watch their progress closely for any signs of malpractices or misconduct.

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    Uncertainty of ROI

    The risk factor associated with startup investing is exceptionally high considering the fact that 90% of startups fail within five years of their inception. It also means that the return on investments is also not guaranteed. The risk associated with ROI does not stop there. Sometimes risks are posed due to liquidity issues wherein it takes a longer time than expected to earn a profit. In some cases, it can also be that despite making a profit there won’t be much money left after deducting expenses incurred.

    Liquidity Issue

    Another major risk in startup investing is the issue of liquidity. When you are investing in a startup, it means your money is going to be bound for a very long time. Even if you start regretting your investment, you will not be able to sell it anytime soon.

    Conclusion

    The very idea of startup investing is a high-risk, high-reward phenomenon. Whether it is going to be rewarding or not is going to depend on a lot of factors including the novelty of business ideas, execution of the plan, customer satisfaction, target achievement, receiving of subsequent funds etc. The one thing that investors can do to be on the safer side is to do thorough research on where the money is being invested and be updated with regard to every minute progress of the firm. Another way to ensure the investor does not lose a lot is not to invest all of the capital in a single startup.

    The entire exercise of startup investment has a far-fledged impact on society rather than just the monetary ones. It can change the fate of a family and even society in itself. Hence, doing deep research and investing prudentially can go a long way.

    FAQs

    How do startup investors make money?

    Startup investors make money on the basis of the equity percentage they got in exchange for their investment in the startup.

    Can a normal person invest in startups?

    Yes, a normal person can invest in startups. One just needs to have the minimum amount of funds available for investing through a private equity fund, VC, or debt financing. Many Angel Investment platforms like IPV even allow people to invest in startups with a minimum investment of as less as 2.5 lakhs INR.

    What is the number one reason startups fail?

    One of the most prominent reason startups fails is because they run out of cash. Money is the most crucial aspect for any startup to keep growing so when a startup fails to raise new capital at the right time, it leads to its downfall.

  • How Can You Raise Seed Funds For Your Startups?

    India has witnessed a significant increase in the emergence of startups in the last few years. India is now the world’s second-largest startup hub, with over 94 unicorns in total. Indian entrepreneurs have evolved into powerful drivers of the country’s economic progress. This is undoubtedly the best time to start a successful company in India.

    With the Government encouraging people to form their startups, more and more people are indulging themselves in this journey. Currently, we have over 65000 startups in the country. The best part is every sector be it fintech, digital marketing or any other, is flourishing in the country.

    Graph showing the Top 5 most valued Indian Startups as of the end of 2021

    You got a Startup idea to build a product that could change lives. You have the Business Model and Product Development roadmap laid out. You might even have a small team to get started in your startup. And then comes the real problem that every Entrepreneur faces – funds to hatch the plan.

    We all know that timing plays a major role in the success of any startup. It’s not a simple task to transform the ideas into a profitable business. Founders might not always have the funds to launch the product at the right time in the market at the beginning. Since growth is the main goal in the initial stages, startup owners must understand how to raise the “seed” capital.

    What are Seed Funds?

    Startups raise seed funds essentially for operational costs like hiring the right people, purchasing tools, leasing offices and more. This crucial step forms the solid basis for launching a thriving business at the right time. When you start a business, the most important thing that is needed is funding. Seed funding means the funds by investors provided to your business in the initial stage. The investors pour their funds in return for an equity stake at the initial stage of business. It is at the early stage that the investment by the investors is done, which helps the business to grow and make its capital. Seed funding should not be confused with a loan. Investors get equity in the company for their investment.
    Now that we know what seed funds are and why they are crucial, let’s dive deeper into the different ways to raise seed capital for your startup.

    Proven Ways to Raise Seed Funds for Startups

    Crowdfunding
    Friends and Family
    Accelerators
    Incubators
    Corporate Seed Funds
    Bootstrapping
    Venture Capital Funds
    Angel Investments
    Debt Funding
    Government Grants and Schemes

    Crowdfunding

    Crowdfunding is becoming increasingly popular in recent years. Many startups have successfully raised seed money through crowdfunding platforms like Kickstarter, Indiegogo and Wefunder. The process involves creating a campaign to convince and persuade thousands of people to invest and buy your product before its developed. This method is a great strategy for founders who do not want to give up equity and dilute the company at the seed rounds. The idea is to build the product from the money made from pre-sales and ship it when ready. Startup founders also utilize crowdfunding websites to understand the market and assess the demand for their products. The idea is to build the product from the money made from pre-sales and ship it when ready.

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    Friends and Family

    Friends and Family are mostly the first places every entrepreneur reaches out to for investment when getting started. Some founders offer equity in the company but many consider this investment as a loan. This method provides a little breathing room in terms of loan repayment.

    Accelerators

    Accelerators typically exist for startups that need assistance with launching and growing the company. Accelerators like Y Combinator runs programs to choose startups for investing. The selected startups get a pre-decided amount in return for a specific percentage of equity. They also support startups with Mentorship and Networking events where the founder gets exposure.

    Incubators

    Incubators are specifically created for startups that are at an early stage. They facilitate the development of ideas and the validation of market fit. The investments are usually small as most founders get this funding to nurture the idea and introduce innovations. Incubators also offer Workspace and Mentorship Support and Networking Opportunities for founders.

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    Corporate Seed Funds

    Many established corporations consider startups as a major source of fresh talents and innovative ideas. Megacorporations are always on the lookout for new ways to invest in emerging technological innovations. Again, this type of financial help gives the startup much-needed exposure and is frequently a precursor to a potential acquisition.

    Bootstrapping

    Let’s not forget that not every startup needs to raise money at the seed stage. Bootstrapping is the process of funding the startup with your savings and reinvesting the profits from the business. Many startup founders use their own money to get their businesses off the ground to eliminate giving away equity at the initial stages. Bootstrapping, on the other hand, might put entrepreneurs under further financial strain.

    Venture Capital Funds

    Venture capital firms offer seed funding for startups with high growth potential. Venture capitalists provide both professional experience and money to entrepreneurs. This type of investment calls for the exchange of a company’s equity for financial assistance. VCs review a lot of projects but only invest in a small percentage of them, so you’ll have to stick out from the pack.

    Angel Investments

    Angel investors are affluent people who invest their own money as seed capital in businesses in return for equity of the company’s ownership. This process is relatively quicker than a VC investment. Many angels are known to use convertible debt as it has the advantage of deferring the company’s value until the next funding round. Angel investors also get discounts for investing early in the startups.

    Debt Funding

    Debt funding is often provided by the bank, an investor or any financial institution to the startup founder. Here, the founder is borrowing the money for a fixed rate of interest instead of giving away any equity in the company. The capital must be repaid with the interest at the agreed timeline. It’s important to note that the only advantage for the investor here is the interest amount.

    Government Grants and Schemes

    The Indian government has stepped up to support young entrepreneurs who need help with growing their startups. The government has taken initiatives like The Startup India Seed Fund Scheme (SISFS) which intends to support startups with the conceptualizing of new ideas, developing prototypes, determining the demand in the market and monetization.

    Conclusion

    There is no doubt that raising the seed funding is difficult. Gaining the right understanding of the options available for you is the key and we hope that our information has helped you.
    You must also know and understand how the different kinds of investors operate, how they make financial decisions to help your startup and how their seed fund can help you grow.
    It’s also worth noting that seed financing isn’t just for the early stages but it’s also for the years ahead. Also, keep in mind that timely capital is critical for companies to stay up in a challenging market like India. A startup that sets growth initiatives should be able to use the seed capital to raise further investments.

    FAQs

    What is Seed Funding?

    Seed funding means the funds by investors provided to your business in the initial stage.

    What are some of the effective ways of raising seed funds?

    Some common and effective ways of raising seed funds are Crowdfunding, Friends and Families, Accelerators, Incubators, Bootstrapping, etc.

    How many Startups are there in our Country?

    There are currently over 65900 startups in the country. But the number is expected to rise shortly.

    What is The Startup India Seed Fund Scheme?

    The government has taken initiatives like The Startup India Seed Fund Scheme (SISFS) which intends to support startups with the conceptualizing of new ideas, developing prototypes, determining the demand in the market and monetization.