In our last article, we mentioned that a new investment avenue has opened for HNI (and retail) investors in India. Investing in startups has become comparatively easy in recent years. It makes it a riskier option since now anyone can invest in startups – with or without proper guidance.
The Shark Tank show was a huge hit last year with its first season in India. The key takeaways from the show are:
According to a report, more than 90% of Indian startups fail in the first five years. The success ratio is less than 10% – there is a 90% chance that you will lose your entire capital in 5 years. Even if the startup continues to grow after five years, the risk of failure is still there. Therefore, you need to be mindful before investing in startups. In this article, we talk about the top points to keep in mind while investing in startups.
Evaluate the promoters: One of the most important things we do at Right Horizons is to evaluate the promoters. In general, startup investments, especially early-stage startups are bet on the promoters. Their passion, conviction, and prior track record are factored in before making a decision. Many startups fail because the core team may be technically competent but may not be great at managing the organization and its finances. A discussion with the founders will give you a better idea of the depth of the founding team.
Analyze the domain: Each one of us has worked in a specific sector or has an interest in a particular industry. The first thing you can do is look for startups from your areas of expertise or interest. It will ensure that you understand the business and potential – you can invest in the company confidently. If you invest in startups from an alien sector, you won’t be able to evaluate the business as you should.
Business plan: When you hear from the founders, their plan should sound like a business plan and not just an idea – which may or may not turn profitable. You must invest in companies (especially in the early stages) working on practical and scalable ideas. You must see the proper framework of the entire process before thinking to invest your money. Also, the business idea should be innovative, new, and solve a problem. Companies like Flipkart and Ola become successful because they identified a mass problem and provided an easy solution.
Analyze the competition: Before you put your money into a startup, you will have to analyze the competition they have in the market. The founders may not touch every aspect of their competitors and may even hide some vital details. Therefore, you need to see how the competitors are doing and if they can scale and replace the company you plan to invest your hard-earned money in.
Look for traction: How good the idea is can only be evaluated once it has been implemented. If you want to reduce the risk, you can make a point to invest in startups that have passed the idea stage. The idea is implemented, and there is customer feedback. You need to look at how the startup is engaging with businesses. You can look at the sales number to get if customers are interested in the product or service. Based on the conversion rate, you can know the prospects. In short, you need to find if the business is selling something which can be sold for the long term.
Examine the legal documents: Every investor needs to review the legal documents because sometimes cheating occurs when investing in a startup company. You need to know who is involved in the company and what is the company’s structure.
Below are the parameters on which the shortlisted startups can be evaluated:
If you plan to invest in startups, you can follow the above points. If you are still not confident, you can get in touch with financial advisors – as they cover you from every angle of startup investing.
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