The startup boom characterised by access to higher and easy seed funding and increased investment in startups led to 44 Indian startups achieving unicorn status in 2021. It fuelled the entrepreneurial spirit and attracted more investors towards investing in startups and capitalising on success stories.
However, investment in startups is a double-edged sword and requires careful consideration of multiple factors, assessment of varied data sets and avoiding some common startup investment pitfalls to succeed.
Let us understand how to invest in startups in India - things to look for and things to avoid.
How to Invest in Startups - Things to Look For
- Viability of business: When attending a pitch, look for an actionable and practical business plan with relevant processes in place, rather than a hastily sketched idea.
- Market opportunity: Before investing in a startup check if the business has clearly identified the target audience and the ways to market the product to them.
- Commitment of the entrepreneur: Carefully assess the motivations, knowledge, network, monetary contributions, time and effort and passion of the founder towards the growth of the business.
- The ‘story up to now’: Investment in a startup should be preceded by a detailed analysis of the journey of the business - past revenue and sales data, engagement with the target market, long-term viability and prospective growth and revenue capabilities.
- Non-quantifiables: Along with the hard data, look for intangibles such as ethics, culture, values, vision and character of the team.
- Workforce: When investing in a startup, ensure there is no concentration risk and the tasks are efficiently delegated amongst a talented and complementary group of employees.
- Advantage over incumbent businesses: If a business is offering an existing solution, check its market advantage with respect to strategic, geographic, values and offerings before investing in a startup.
- Exit strategy: Prepare a rough exit strategy by aligning the business’ prospects with your expected returns.
What to Avoid When Investing in Startups
- Do not get blinded by the glittery, new and exciting packaging - cool lingo, bean bags, colourful offices, and quirky mood boards and decks.
- Do not forget to ask the right and tough questions and clarify all doubts, however minor.
- Do not put all your eggs in one basket. Diversification is the key to success.
- Do not go beyond your budget. Investment in startups is about investing in optimal investment amounts.
- Do not settle for less by investing in startups with low growth potential and too distant capabilities that do not offer a viable exit avenue.
Conclusion
Avid Shark Tank followers may have heard the Sharks listing multiple reasons why something doesn’t work for them and finally stating “...and for these reasons, I am out.” However, at the same time, another shark may be interested in the same pitch.
Thus, the list of things that work for investors differs based on individual preferences. Investors should make sure to prepare a checklist of their individual preferences, such as choice of industry, relevant performance metrics, ownership ratios, preferred intangibles, optimal investment amount, investment tenure, etc., before investing in a startup.
Additionally, investors can sign up with investor networks or integrated incubators like Venture Catalysts that align the expectations of the right set of investors and businesses to build a mutually beneficial ecosystem.
