Unlocking The Potential Of Startup Equity: A 6-Pointer Strategy

Introduction To Startup Equity Investments 

If you have an innovative idea that solves a common problem and your solution that can be scaled up, then India is a reliable ecosystem to fulfil your entrepreneurial dream. With more than 99,000 DPIIT-recognized startups as on May 2023, India ranks third in housing startups. Although the startup culture is not old in India, its fast-paced nature and support from our government have led to a 15x rise in the total funding of startups in the last 10 years.  

Till a few years ago, investing in startups was considered a game only for large investors like venture capitalists, private equity firms, and the like with the required initial investments amounting to crores.  Elevation Capital, Sequoia, Matrix, Kalaari, Blume, Venture Highway, and Anicut Capital are some of the well-known investors in start-ups. 

Indian startups are now witnessing a major shift in sources of funding. Alternate investment routes like crowdfunding, venture debt, and revenue-based financing are increasingly getting more popular with both founders and are also inviting a different persona of investors. With this paradigm shift, new investors, including individuals have an opportunity to invest in start-ups at small ticket sizes. Let us dive into a 6-point strategy to keep in mind before investing in startup equity.

Things To Keep In Mind While Investing

• Understanding The Risks And Rewards

Any investment opportunity comes with a disclaimer of the risks involved. While the potential rewards from any investment may be very large, so can the losses. Despite the promises of alluring returns, an investor should weigh the potential risks too. They should vet the financial stability, quality of the leadership and management, product-market fit, and scalability of the startup before committing the money.

• Conducting Due Diligence On Startup Opportunities

Due diligence on a promising startup is the most crucial step for any investor. It helps an investor with the evaluation of the startup’s market size, viability, vulnerabilities, and probable profitability. An investor should study the financial backing and health, previous success stories, management, and leadership philosophies, transparency and other core values, and legal and regulatory compliance before investing in startup equities. 

• Evaluating The Startup's Business Model And Market Potential 

The success of any startup eventually depends on the revenue it earns from its products or services. Therefore, it is safe to say that for a startup to succeed, it should have wide market potential, i.e. it should have a high number of potential customers along with a robust business model to meet the requirements of these customers. 

• Assessing the Team and Leadership of the Startup 

According to a study, 60% of startups fail due to subpar teams and inefficient team management. While selecting a startup to invest in, you should assess the leadership and team for their prior experience in similar setups, market, and product knowledge, flexibility, and adaptability to change according to customer feedback, and necessary industry skills.

• Negotiating Equity Terms and Understanding Investment Structures

Most profitable investments come when they are made at the right price. The same philosophy goes with startup equities. As an investor, it is important that you understand the investment structure and its term sheet clearly and that they are not biased in favour of the founders only. 

A term sheet refers to a bullet-point document containing the terms and conditions of a potential business/ investment agreement and establishes a sound basis for future negotiations between its founders and investors. 

• Exit Strategies 

Correct timing is of the utmost essence in any investment. It applies to both investing and exiting at the correct stage of a startup. As per a saying “Investors are in the business of exits”.

As an investor in startup equity, it is crucial for you to understand the exit potential of the startup. You should be aware of the advantages and disadvantages offered by various exit routes like IPO, a strategic sale, or a financial exit along with the right time to exit from your investment. 

Sounds complicated and require too much of your effort? We agree! Especially as access to information for private companies is limited and you may not be able to spend enough time to properly evaluate an investment opportunity. Most individual investors also face the challenge of accessing enough start-up equity investments to be able to create a diversified portfolio. 

A Smarter Way To Invest In Startup Equities

Several online platforms today have made it easier for investors to find, evaluate and invest in start-ups. Platforms like Grip allow retail investors to invest in startup equity for as low as INR 2,00,000/- through a SEBI-registered alternative investment fund. To help make your investment decision easier, Grip curates only those start-ups that have a high-quality Venture Capital firm as an investor. 

Therefore, retail investors can realise their dream of owning startup equities at low-ticket-size, high-growth companies.. Sign up on Grip today and explore the whole new world of investing in startups!

Conclusion

Startups and every vocabulary associated with them bring excitement to potential investors. With the multifold rise in numbers and valuations of Indian startups, the interest of Indian investors to hold these startup equities is exemplary. The advent of alternative investment platforms which allow retail investors to own startup equity is an enabler to investments and wealth creation. However, choosing the right startup and investment platform is crucial to cover an investor’s risks. 

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Happy Investing!

Disclaimer: 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 Technologies Private Limited ("Grip", formerly known as Grip Invest Advisors Private Limited) is not registered with SEBI in any capacity and does not advise, encourage, or discourage its users to invest or not invest in any securities. Grip is solely an execution-only platform and does not guarantee or assure any return on investments made by you in any opportunities sourced by Grip and accepts no liability for consequences of any actions taken based on the information provided. Your investment is solely based on your judgement. Investments in debt securities are subject to risks. Read all the offer-related documents carefully.