Funding A Start-up - Things To Consider Before You Invest

Your friend or a relative has decided to start their own business, and their business idea seems appealing on paper, which makes you think that this business has the potential to make it big. However, when the entrepreneur turns to you for investment or funding, would you instantly agree? Though you are interested to see your loved one succeed in their venture, you cannot agree to invest without fully knowing what you are committing to. So the answer is no, because funding a startup is not as easy as it may seem.

While investing in a startup has the potential to yield significant returns, it is not entirely risk-free. A startup is a long-term investment. There are absolutely no guarantees on the business taking off, and if the said business fails, you may have to walk away with nothing. 

Grip offers some advice on the key factors that should be considered before you invest in a startup.

Level of Involvement:

The level of involvement while investing in a startup is directly proportionate to the type of investment. For example, if you are planning to invest in a startup through a venture capital firm or a crowdfunding platform, you would only have limited interactions with the startup’s management team. You may also have a limited say in the decision-making process. At Grip, you will invest alongside a Venture Capitalist (VC) fund/lead investor, who is in-charge of the due diligence and negotiation. The lead investor will also play a key role in management once the investment has been made. 

Seeking expert advice:

The key to a good investment is investing in what you know and understand, rather than venturing into the unknown. To get a better idea on what you are investing in, talk to a professional from the same field. Talking to an expert will help you see certain aspects of the business you didn’t know or notice before, which will help you make a more informed decision. At Grip, you will be investing alongside lead investors who will execute due diligence on your behalf and offer expert advice, thus helping you make the right decision.  

Profit timeframe:

Though investing is a long-term process, it is essential to have some idea of the profit timeline. In order to get an approximate timeframe, you can evaluate the startup’s track record. One of the best ways to judge a startup’s potential is through its burn rate – the pace at which a company spends its capital each month before reaching profitability. If the startup is in its early stages, but the burn rate is high, it may be an indication that the investors may have to wait longer for returns. 

Growth prospects:

One of the first things to consider before funding a startup is to study how well the company is growing, whether the company is showing more organic growth or expanding through distribution? If it is the former, it means that there is merit in the business idea.

You can also dig into the financial statements of the company to analyze its growth. The most common growth rate metrics you can consider in evaluating a startup are revenues, earnings, price-to-earnings ratio, return on equity (ROE) and many more. While investing with Grip, you have the opportunity to invest in companies that have maintained a strong track record in terms of business growth and fulfilling obligations.

Expected rate of return:

While investors are often fuelled by the desire to help startups succeed, the possibility of profits is a huge part of the appeal. Analyzing the potential Rate of Interest (ROI) of the startup is a must, if you are looking to maximize your earnings. The returns also depend on the type of investment.

Diversification:

For any investment portfolio, diversification is the benchmark with the goal being risk minimization without limiting the returns. While investing in startups helps with diversification, investors must consider how it affects their overall asset mix, and then find the right balance. While stocks have clear divisions between asset classes, making it easier to manage risks in your portfolio, startups are a different game altogether. As startups are usually a hit or a miss, the more startups an investor invests in, the greater the odds of achieving profits. At the same time, investing in too many startups may backfire if there isn’t a winner in the group.

Exit strategy:

Having an exit strategy is mandatory for any investment, especially with startups. Study the possible exit scenarios pertaining to the industry. Investors should be clear on when they can withdraw their initial investment, along with any gains. Investors also need to do their research on who can be their potential buyers of the business when the business reaches an ideal scale.

In conclusion

At Grip, you have the opportunity to be a shareholder in high-growth, disruptive startups, where the minimum investment is just ? 2,00,000. Every investment opportunity is led by a venture capitalist firm that conducts the due diligence, finalizes the valuation, and plays an important role in the on-going corporate governance. Most of your investment opportunities will be with companies that have previously raised leasing or inventory financing capital from Grip, which means that their track record in terms of payments and growth is well-known, and your investment is in safer hands. If you are looking to diversify your portfolio, you can start by investing in Start-Up Equities with Grip.  

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Disclaimer - Investments in debt securities are subject to risks. Read all the offer-related documents carefully. The investor is requested to take into consideration all the risk factors before the commencement of trading. This communication is prepared by Grip Broking Private Limited (bearing SEBI Registration No. INZ000312836 and NSE ID 90319) and/or its affiliate/ group company(ies) (together referred to as “Grip Invest”) and the contents of this disclaimer are applicable to this document and any and all written or oral communication(s) made by Grip Invest or its directors, employees, associates, representatives and agents. This communication does not constitute advice relating to investing or otherwise dealing in securities and is not an offer or solicitation for the purchase or sale of any securities. Grip Invest does not guarantee or assure any return on investments and accepts no liability for the consequences of any actions taken based on the information provided. For more details, please visit https://www.gripinvest.in/. 
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