The Indian startup ecosystem is currently in a phase, with deals and activities taking place at an exponential rate. The unprecedented record that India set last year, i.e. over $38.4 Billion raised and over 40 startups joining the unicorn list. This trend has paved a way for startup investors on the lookout for investment opportunities to invest in Indian Startups and reap the benefits of this startup saga. Startups have been reported to have a hyper-growth mindset.
How To Invest In Startups In India
This unconventional approach achieves success by accepting large amounts of funding and resources to grow at an exponential rate. Before one decides to invest in startups in India, it is important to know why startups need funding and the various stages of funding.
Here are some pointers on how to invest in startups in India:
Individuals and businesses who believe in the venture contribute money and other ancillary resources to assist the founders in making the startup a success. In exchange, they are given stock in the company, or interest is paid in case of loans. These act as incentives for people to invest in the company.
Stages Of A Startup and their Funding Requirements:
How to Invest in Startups in India:
Once an investor has decided in which stage of the startup they would like to invest in based on the role and their profile, there are two ways in which startup investors can proceed.
- A Direct Investment – Direct investment in a startup in India provides startup investors the option to fund a startup of their liking without the involvement of any third parties. Third parties would include – venture capitalists, debt capitalists, or private equity firms. Angel investments are an example of direct investments.
- An Indirect Investment – In this form of investment, investors credit capital to debt capitalists, venture capitalists, or a private equity firm who then invest this capital in a plethora of startups. Investing through the indirect method would require a financial advisor to research and hand you a list of potential investment opportunities.
Remuneration to investors is generally made when a start-up is acquired by a larger organization or when it makes its IPO exit and enters the stock market. Although, this trend is not applicable to debt investments. Debt investors earn a steady income through interest on capital lent.
Government Imposed Norms And Regulations:
SEBI, India’s market regulator, introduced new rules in 2012 to allow angel investors to register as AIFs, a new type of pooled-in investment vehicle for real estate, private equity (PE), and hedge funds. This was introduced to avoid abuse of the regulation through laundering money. SEBI limited such funds’ investment to INR 550 million and only in companies incorporated in India that were less than three years old and had no family connections. By 2019, INR 17 billion had been invested in 254 startups through SEBI’s AIFs, and SIDBI had committed an additional INR 31 billion to 47 SEBI-registered AIFs as of July 2019. (FE Online 2019).
When the Startup India program was launched in January 2016, the Government of India also announced the establishment of a Fund of Funds for Startups (FFS) at the Small Industries Development Bank of India (SIDBI) with a corpus of INR 100 billion to be allocated to alternative investment funds (AIFs).
Individuals whether Indian, NRI, or Foreign are permitted to make investments in venture capital firms or private equity funds as long as they meet the minimum amount of funds required. Individuals investing in any of the above instruments must invest a minimum of INR 1 crore. Angel investments do not have a minimum investment requirement and are based solely on an agreement directly made with the startup of your choice.
As startup investors, you have a chance to invest in ideas and businesses that have the potential to change the world for the better. As a result, it gives people a chance to contribute to the change they want to see and bring in the world around them.
Many people who make angel investments see startup investing as a side hustle from which they can generate additional revenue. With all the excitement and innovation going on in the startup ecosystem, it’s a great place to spend your spare time analyzing and investing in startups.