BASICS TO INVESTMENTS IN STARTUPS

Startups are growing rapidly all around the world. Especially in India, as the startup drive is being promoted by the central government itself, the number is increasing massively. A recent survey concluded that the Government of India is collaborating with loan companies to provide a startup funding of Rs. 1611.1 crores to venture capital companies.

Investing in startups is a great approach, however, it is essential to understand it thoroughly before taking any steps.

In this article, we aim to inform you all about the basics to investment in startups, by answering the following questions:

  • What is investment?
  • What are the types of investments?
  • What is investment in startups?
  • How investments in startups work?
  • How to ensure safe investment in startups?
  • What are the benefits of investment in startups?

Let’s begin by discussing about the meaning of investments first.

What is investment?

Any asset acquired with the aim of generating an income is an investment. Instead of consumption, the
aim is to use it as a means to create more wealth in the future and increase its value over time. An
investment is usually done with the hope that the payoff in the later future will be much greater than the
amount which was invested originally.

Some common forms of investments include purchasing stocks, bonds, and real estate. As investing
involves leveraging finances for a future gain that is more potential that definite, it is associated with a
certain level of risk. However, there are different types of investments you can undertake by ensuring
what suits best to you. Let’s take a look.

Now that you know about what investment really means, let’s take a look at the various types of
investments.

What are the types of investments?

There are three major types of investments which you can use as tools to accomplish your financial goals:

  1. Stocks:Investing in a stock entails ownership. When you invest in the stock of a corporation, you
    become one of its owners. Stocks represent equity or ownership shares. Factors such as the type of stock you purchase, the conditions of the stock market and the success of the company help to determine whether the investment is profitable or not.
  2. Bonds:: At the most basic level, a bond is a loan. As an investor, you provide an amount at loan to
    a corporation or agency or entity at an interest rate which is supposed to be paid over a specific time period along with the principal amount’s repayments when the bond matures. There are several types of bonds including agency bonds, treasuries, corporate bonds, bond mutual funds, etc.
  3. Investment Funds: Investment funds mainly include Mutual Funds, Exchange-Traded Funds and
    Funds and Fees. Investment funds work by pooling the money of many investors and theninvesting it according to a particular strategy. There are publicly offered funds, which include mutual funds, close-end funds, exchange traded funds, unit investments trusts, and there are private investment funds which are also known as hedge funds.

Now that you are aware about the various types of investments, let’s understand what investment in startups implies.

What is investment in startups?

A startup is basically any new company that has been established just a while ago, mostly less that 5-10
years and has the business design to scale speedily. Mostly, startups begin with a very small project or
idea. To work on the said project, they reach out to venture capitalists or investors for funding.

In recent times, startups have become the new age superheroes, overturning the traditional industrial
model and coming in with exceptional solutions to significant problems – all while earning massive profits
on their creative products and services.

As startups scale quickly, investors who put in their money receive outstanding gains as the business
evolves. But, how do investments in startups really work? Let’s see.

How investments in startups work?

Essentially, startup investors buy a portion of the company with their investment. It is very similar to
purchasing stocks. However, as a startup is a sprouting business, investment here means that the
investors are providing capital in exchange of equity, i.e. a part of the ownership and rights to future
profits.

It is very straightforward – a partnership is formed. If the startup becomes a success, the investors receive proportionate returns according to their initial investment.

Equity in a startup has tough liquidity. Liquidity refers to the easiness of converting security into cash
money. However, in startups, equity is difficult to sell off. However, one way investors can make profits by
selling is to sell a portion or all of the ownership in a liquidity event like acquisition or Initial Public
Offering (IPO). Liquidity events are amazing opportunities to turn tied up money in equity into cash, as
during successful IPOs the price per share of stock increases significantly from pre-sale values, thus the
value of investors’ holdings rises.

Startup equity is a highly risky yet highly rewarding asset. It is risky because many times startups are
unable to succeed and repay investors, and then the investors are unable to sell off the equity. However,if the startup succeeds or if you invest in a startup that is already doing well, you’ll be in line for receiving
potentially massive returns.

Some startups also allow a secondary sale of stock, which is when they let their investors sell off shares
before the IPO, but with certain restrictions and right of first refusal.

The primary appeal of startup investing is that with high risk, it offers high rewards. Investing in a
succeeding startup will lead you to gigantic profits. However, these days, early-stage startup investments
are the key to higher gains. By the time you wait for it to go public, majority of gains might slip off your
hands. In fact, lately many startups are focusing on remaining private for longer time periods, because
there are many benefits for them such as they can avoid accounting expenses, activist investors, and
initial pressure for higher gains. So, by the time they go public with IPOs and quasi-IPOs, the initial
investors gain massive amounts of returns.

Now let’s see the various steps you can implement to ensure that your investments in startups are safe.

How to ensure safe investment in startups?

We’ve established by now that investing in startups is highly rewarding but risky as well. Hence, it is not
an easy task. That’s why it is essential to ensure safe investment.

Here are two ways you can ensure safe investment in startups:

1. Investing time in risk control

You must invest time in risk control measures to you ensure that you don’t end up losing massive
amounts of money in case the startup doesn’t succeed. You can do so by:

  • Negotiating the startup’s valuation
  • Including the vesting agreement before investing
  • Discussing about liquidation preferences in advance

2. Selection and valuation

You must analyze all internal and external factors that can potentially influence the startup’s future. It is
imperative to ask a few questions and focus on certain factors as safety precautions, such as:

  • Evaluating the growth projections and statistics
  • Ensuring the team is hardworking, smoothly-functioning and highly motivated
  • Focus on how the startup will challenge the competitors
  • Is the market for the product/service huge?
  • Is the business model effective?
  • Are there smooth exit strategies in case you wish to leave?

All these factors vary from one startup to another as they are influenced by numerous other physical
factors such as where the startup team is working, do they have enough resources, is the targeted market fitting, etc. Hence, you must take up these two steps at least to ensure that you are safely investing in a
startup.

Now, as you have understood what it takes to make your investments in startups safe, let’s take a look at
the numerous benefits that come with these investments.

What are the benefits of investing in startups?

Investing is startups is getting more and more popular by the day as there are numerous benefits to it,
such as:

  1. Investing early will give you more say in influencing the direction of the startup.
  2. Initial investment will help you gain higher returns.
  3. You can grow your own business at a large scale by investing in a startup.
  4. It offers new business opportunities as when you invest in startups, you get in touch with more
    and more teams.
  5. The Indian government supports the companies that invest in startups and offers them various
    financial benefits.
  6. If you collaborate with the government to increase fund raisings for startups by investing, you
    yourself get a number of benefits and exemptions.

Some other benefits of investing in startups are:

  • New Sections In The Income Tax Act
    Several new sections have been added to the income tax act related to exemptions, rebates and benefits
    to give a strong push to development of startups, funding and investments in startups. Hence, new rules
    and norms including exemptions have been introduced to motivate more and more people for
    investment. Investors are also allowed various exemptions and rebates pertaining the filing of returns.
    100% tax exemptions on the startup’s profits generated for three years leads to a significant ROI for
    investors over the years.
  • Expansion of investors and building face value
    As an investor, investing in startups and helping them grow can significantly affect your face value and
    reputation in the market. Not only will it bring you recognition, it will also bring in more contacts,
    business deals, financial benefits and additional business. It will show that you are promoting new,
    growing businesses and also benefit your reputation by depicting how well you are handling your social
    responsibility.

Conclusion

Startups in India are growing exceptionally quickly, and investing in them can be highly beneficial. Also, as
these startups are emerging in India, a healthy competitive market is being created in our economy. As a
result, the GDP (gross domestic product) and the per capita income of our country is also increasing, and
will also rise in massive amounts in the near future if the scenario keeps growing. This is establishing an inclusive and growth oriented business environment for old industries and businesses as well as for new startups and enterprises.

With strict adherence to all government regulations, HighGains is a highly effective platform that enables
you to invest in startups and futuristic ideas of your choice. With a minimal investment of Rs. 10k – 15k,
you can purchase our coins in the form of a digital currency. Later, you can redeem these coins on
HighGains at any point of time with the current valuation of the company in which you’ve invested. If
you’re interested, contact our team of experts to learn more and begin your journey with HighGains.