The word ‘startup’ has become very popular in the last few decades. What do most of us think of when we think of startups? Probably Google, Amazon, Microsoft, Apple, Facebook, or maybe Flipkart, Myntra, Snapdeal, Paytm, Ola, OYO, Zomato, Swiggy, etc. the list is a bit long. There is hardly anyone whose life has not been impacted by one or many of these internet startups. Because of these internet startups, the world is much more convenient today than it was at the turn of the century.
What is a startup?
A startup is a company that is in the first stages of operations and typically doesn’t have a working product, customer base, or a fully developed business model. These companies generally start with high costs and limited revenue, funded by their founders. Startups normally attempt to attract outside investment before rising from the ground. If they are successful, the investors who took a risky bet on a budding company will also make very high returns on investment, ranging from 100% to 1000%.
What are the risks and rewards of investing in a startup?
In today’s world where there are lots of opportunities to both make money and lose money, making money from investments is an art and definitely requires a stroke of luck. In this piece of article, we will walk you through the most important aspects of startup investment – how to plan to invest in startups, and how much you should invest depending on your profile – that will minimize the risk on your investment and provide handsome returns.
How to invest in startups?
Around 90% of startup companies end up closing before they make it to Initial Public Offering (IPO). Investing in startup companies is a very risky proposition, but it has potential to make outsize returns if and when investments pay off.
Here are 5 important startup investment tips for attractive returns you should keep in mind when investing in one or more startups:
- Before investing in startups, it is important to figure out how much you would lose if a startup fails and if it succeeds how much you would make of it.
- Even investors with moderate risk tolerance can allocate 10% of their wealth to startup investment. Losing such an amount may not make a big dent in your finances, but if the business is successful, it can offer whopping 100 to 1000X returns, depending on the level of success.
For example, if you lose Rs. 100 out of Rs. 1000 in your pocket, you may not suffer a big loss, but if you make Rs. 10000 by investing Rs. 100, you will accumulate great wealth.
- Before investing in a startup company, it is essential to conduct due diligence for a venture to evaluate the business plan and potential for generating profits in the future.
- Taxation should not be a matter of concern. When it comes to investing in startups, you shouldn’t bother about tax because the taxed amount would be minuscule when compared with 100 to 1000x gain.
- Last but not the least. Founder’s profile is of paramount importance. Experienced investors including angel investors and VC investors believe that personality and drive of the company founders are as important as the business idea itself.
At the end of the day it’s the skill, knowledge, and passion of founders which will help carry the business through periods of growing pains and discouragement. A founder has to be agile and nimble enough to smartly lead a business venture even during unforeseen economic events or technological changes.
Google is a prime example of a successful startup story. It was launched as a startup in 1997 with $1 million seed funding from founders, friends and family (FF&F). In two years, the company received $25 million in venture capital funding and two VC firms acquired around 10% each of the company. In 2004, Google’s initial public offering (IPO) raised over $1.2 billion for the company and half a billion dollars for original investors, which is almost 1700% return.
Bottom line
The startup ecosystem in India is at its peak with over 62,200 DPIIT- recognized startups across 636 districts as of January 2020. Hence, retail investors have a great opportunity to invest and get the returns of the great Indian startup story.
Don’t forget that big return potential is associated with the incredible amount of risk inherent in new companies. When considering an investment in a startup ecosystem, remember that there are a whole host of unique risk factors that must be addressed.
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