Startup Investment Strategies In India: A Guide

Investing in Indian startups can be a rewarding but risky venture. There are several ways to get started, including investing platforms such as AngelList India, LetsVenture, and SeedInvest, or connecting with startup incubators and accelerators. Due diligence is crucial when assessing startups, and it's advisable to seek advice from financial experts. It's also important to consider how your investment decisions align with your career goals and comply with employment contracts and company policies. Before investing, familiarise yourself with the market trends and financial news, and consult a certified financial planner.

How to become an angel investor in India

Angel investors are individuals or companies that provide funding to early-stage startups in exchange for equity or revenue sharing. In India, angel investors are highly sought after by startups and other early-stage businesses.

If you want to become an angel investor in India, here are the steps you need to take:

Understand the risks and eligibility criteria

Angel investing is a risky investment approach, and it's important to understand the potential challenges. The Securities Exchange Board of India (SEBI) has set eligibility criteria regarding minimum net asset requirements, which you must meet to become an angel investor.

Educate yourself

It is crucial to understand all aspects of investing before committing your capital. Attend workshops, seminars, and investor masterclasses conducted by angel groups and incubators to learn about startup valuation, the investment process, and identifying startups with growth potential.

Make connections and join networks

Networking with existing angel investors is an excellent way to gain insights into the field and build your investment network. Join Indian angel network incubators, angel funds, and groups to learn from experienced entrepreneurs and investors, reducing common risks.

Develop a strategy

Define your investment strategy, including the sectors or industries you want to focus on, your preferred investment amount and tenure, and whether you prefer lump-sum or staggered investments.

Find investment opportunities

Look for platforms dedicated to angel investing, such as Angellist, Mumbai Angels, and Let's Venture, where startups pitch their ideas to investors. Alternatively, source 'direct deals' through your social network.

Make your first investment

Once you feel confident about identifying the right investment opportunity and have done thorough research, take the leap and make your first investment. Track your investment regularly to assess its success and reflect on the effectiveness of your investment decisions.

Due diligence for startup investing

Due diligence is a critical process when considering investing in startups in India. It helps investors make informed decisions by investigating and evaluating the potential risks and benefits of an investment opportunity. Here are some key considerations for conducting due diligence:

Financial Analysis

The first step is to review the startup's financial statements, including the balance sheet, income statement, and cash flow statement. This provides an understanding of the company's financial health, such as revenue, expenses, and cash flow. Investors should also assess the company's cash position, revenue streams, and operating margins. It is important to analyse historical data, forecast performance, and funding requirements to gauge the financial health of the startup.

Market Analysis

Investors should assess the market potential of the startup, including market size, competition, and growth prospects. Identifying barriers to entry and evaluating the startup's value proposition are crucial. Market research helps determine the demand for the startup's products or services and understand the target market, competition, and industry trends.

Management Assessment

The quality of the management team is essential. Investors should evaluate the experience, background, and track record of the management team members. Assessing the organisational structure and culture is also important to understand the company's decision-making processes and strategic direction.

Operations Review

Investors should review the startup's operations, including its products, services, and processes. This involves assessing operational efficiency, scalability, and growth potential. Understanding the company's ability to scale and its operational readiness is crucial in determining its potential for success.

Technical and Intellectual Property Due Diligence

This analysis focuses on the technical aspects of the startup's products or services and the underlying intellectual property. It is particularly critical for tech companies. Investors should assess the phase of product development, growth potential, scalability, and intellectual property protection.

Tax and Financial Due Diligence

Investors should analyse the financial position, cash flows, scalability, and long-term prospects of the startup. Reviewing audited financial statements, income tax returns, credit ratings, and tax-related correspondence is essential to understanding the financial health and tax compliance of the company.

Human Resources Due Diligence

Understanding the employment contracts, labour laws, labour relations, regulatory policies, work culture, and industry standards is crucial. Investors should review insurance plans, retirement plans, HR policies, employment contracts, and labour turnover rates. This provides insights into the company's employee retention, benefits, and compliance with labour regulations.

Legal and Regulatory Compliance

Finally, investors should assess the startup's compliance with relevant laws and regulations, including labour laws, tax laws, and environmental regulations. This includes reviewing licensing agreements, loan agreements, financing arrangements, and any pending or past legal cases. Ensuring legal compliance helps protect the business from potential liabilities and penalties.

Due diligence is a comprehensive and detailed process that helps investors make well-informed decisions about investing in startups. It is crucial to reducing the risk of making uninformed decisions and ensures a thorough understanding of the startup's viability and potential.

Understanding startup funding stages

Pre-Seed Stage:

The pre-seed stage is the initial phase where founders brainstorm and refine their business idea. At this stage, funding primarily comes from self-financing or "bootstrapping," where entrepreneurs rely on their savings or revenue to get started. Micro-venture capitalists, family, and friends may also contribute to pre-seed funding. This stage involves developing a prototype, conducting market research, and determining the business model.

Seed Stage:

The seed stage is when a startup officially receives its first round of funding. Angel investors and early-stage venture capitalists invest in startups to help develop their concept into a full-scale product. This funding enables startups to conduct proof of concept, build prototypes, and prepare for market launch. Costs covered at this stage include market research, product development, and hiring key personnel.

Series A Funding:

Series A funding marks the entry of venture capitalists, who invest larger amounts of capital in exchange for shares of the company. To attract Series A funding, startups need to demonstrate a strong, long-term business model and a clear plan for future growth. This funding enables startups to optimise their operations, offset financial losses, and further develop their products or services.

Series B Funding:

Startups that have achieved Series A funding can seek Series B funding to cement their brand and expand their business. This funding is typically provided by venture capitalists or late-stage venture capitalists. Companies at this stage have a dedicated user base and steady revenue streams. Series B funding helps startups increase market share, employ advanced market reach activities, and form operational teams.

Series C Funding:

Series C funding is for well-established startups with strong customer bases and recurring business models. This funding enables companies to venture into new business lines, add new products or services, or acquire other entities. Series C funding is typically provided by late-stage venture capitalists, private equity firms, and hedge funds.

Series D Funding and Beyond:

Startups may seek funding beyond Series C due to new opportunities or subpar performance. There is no limit to the number of funding rounds a startup can go through. Series D and subsequent rounds allow companies to act on lucrative opportunities before an Initial Public Offering (IPO) or address issues that arose during previous funding rounds.

Mezzanine Funding and Bridge Loans:

These funding types are designed for mature businesses valued at over $100 million. Mezzanine funding blends debt and equity for lenders, while bridge loans are short-term financing options to bridge the gap before an IPO. These loans can be used to buyout management or acquire competitors and are typically paid back with IPO proceeds.

Initial Public Offering (IPO):

The IPO is the pinnacle of startup success, where shares of the company are offered to the public for the first time. It is a complex process involving regulatory requirements, financial audits, and the formation of a public offering team. IPOs are typically undertaken by startups with impressive profit track records and steady growth. They provide an exit opportunity for investors, who can sell their shares to the public or other investment firms.

Government schemes for startup funding

The Indian government has implemented numerous schemes to support and promote startups in the country. Here is a detailed description of some of the prominent government schemes for startup funding in India:

Startup India Initiative:

The Startup India Initiative is a flagship program that aims to simplify regulations for startups. It offers self-certification, compliance relaxations, funding opportunities, mentorship programs, and a startup ranking platform. Over 58,000 startups have benefited from this initiative, and it has helped create an estimated 1.75 lakh jobs.

Startup India Seed Fund Scheme (SISFS):

The SISFS provides financial assistance to startups in their early stages, including proof of concept, prototyping, product trials, market entry, and commercialization. The scheme is executed and monitored by the Department for Promotion of Industry and Internal Trade (DPIIT) through an Experts Advisory Committee (EAC). The EAC selects eligible incubators who receive grants of up to ₹5 crores each. These incubators then provide startups with up to ₹20 lakhs for the validation of proof of concept, prototype development, and product trials. Additionally, startups can receive up to ₹50 lakhs for market entry, commercialization, or scaling up.

Credit Guarantee Scheme for Startups (CGSS):

The CGSS scheme guarantees loans up to ₹5 crore from participating banks, making it easier for startups to access credit. Over 7,300 startups have benefited from this scheme, with sanctioned loans exceeding ₹29,500 crore. The loan types offered include term loans, working capital loans, and purchase order financing. The scheme offers benefits such as up to 80% guarantee on loans, reduced interest rates, and longer repayment tenure.

Atal Innovation Mission (AIM):

AIM provides grants of up to ₹10 crore to support innovations in healthcare, education, or agriculture. It has established 75,794 Tinkering Labs and 708 Atal Incubation Centers across India. The program includes Atal Tinkering Labs (ATL) in schools to promote scientific temper and innovation, and Atal Incubation Centers (AIC) to nurture startups across various sectors.

Software Technology Parks of India (STPI):

STPI offers tax benefits, infrastructure support, and incubation facilities to IT/ITES companies with export intent. It has nurtured the growth of over 85,000 STPI units, which have collectively generated exports worth over ₹5.5 lakh crore. STPI also has a special initiative called "STPI NEXT" that focuses on emerging technologies like AI, AR/VR, and IoT.

These schemes demonstrate the Indian government's commitment to fostering innovation and supporting startups in the country. Each scheme has specific eligibility criteria, application processes, and benefits, which can be found on the official websites.

Startup investing platforms in India

AngelList India is a leading platform that offers market access and infrastructure for investing in top-tier, venture-backed companies in the country. Inflection Point Ventures (IPV) is the largest CXO/Professional network in India, offering transparency throughout the investment process. LetsVenture provides a gateway to India's private markets, empowering individuals and organisations to participate in the Indian startup ecosystem.

Startup India, an initiative by the Department for Promotion of Industry and Internal Trade (DPIIT), offers a range of benefits to eligible companies recognised as startups by DPIIT. These benefits include tax advantages, easier compliance, and IPR fast-tracking. The Startup India Investor Connect platform specifically connects startups with investors to facilitate investment opportunities and promote entrepreneurship.

Frequently asked questions