How To Start Investing In The Indian Startup Story

Picture courtesy: Shutterstock

Early this year, I got a call from a friend who wanted to know how she could start investing in startups. She was someone who invested in land a decade ago, and sold it for 3x recently. But investments in gold and real estate weren’t as appealing to her anymore.

“I invested in a piece of land in 2010 at INR 1Cr. I just sold it for INR 3Cr. Now I’m thinking of investing INR 1 crore in a VC fund  – yes it’s not liquid, but it gives me exposure to this new world. In a small way, I am contributing to the creation of jobs and riding the Indian digital wave,” she said. 

This sudden interest in startups is hardly surprising. There are enough stories of people making multibagger returns by betting on tech startups. Adding to the frenzy is the news of a new unicorn every two weeks. Everyone from a businessman in Kanpur to an NRI in Singapore wants to ride this Indian digital wave. It wouldn’t be a stretch to say that investing in startups now has the same charm that stock markets or crypto hold for those looking to build wealth. 

While the valuations are tempting, it is easy to get blinded by the glitz and forget the basics. 

For anyone starting their journey in investing in this asset class, here are some ground rules. The first step is identifying why you want to jump into the ring:

“I just want exposure to a new asset class!”

If your objective is to simply add a new asset class or get better returns in this market, you’re better off investing in a venture fund instead of issuing small cheques yourself. The partners of such funds are experienced, and you are spared the headache of evaluating various startups to pick the right ones. Ideally, you should be going with either a proven fund or a fund run by managers who have a stellar investing track record. It is important that you check the past performance of the fund and look at its portfolio companies. One way out is to go with an established fund since they are usually battle-hardened and unlikely to make rookie mistakes. It is also a good idea to check in with the founders of the companies that the fund invests in. If they had a good experience with the partners, it is likely that they will recommend fellow founders to consider the fund and ensure a steady stream of good quality investment opportunities.

Minimum investment with a fund would be INR 1 Cr. Ideally, one should keep at least INR 2-3 crores aside to invest over consecutive fundraises of a single VC fund over a period of 5-6 years – you never know which fund ends up with outsized returns. Think of it as an SIP in venture capital. In most cases, you would be investing INR 30 lakhs a year for the first 5-6 years, also called drawdowns. Post this period, you would start seeing returns from the first fund and may not need to pump in any fresh capital. 

Typically, you can expect a return of 3-5x of capital invested, but >5x gets harder to achieve if the fund size is too large. 

The downside? You’d be locked in for 8-12 years and will be investing in a blind pool, which means you don’t get to interact with the founders except during the annual day mixers organized by the fund. There will be limited scope for helping ventures that get backed unless you add immense strategic value. 

“I want to be active and learn more about the ecosystem!”

If this is your aim, you probably want to be an active catalyst in the growth of companies that you bet on. This is a huge undertaking, and it’s wiser to do so as a part of a group when you are starting off, instead of handing out cheques alone.

One way to do this would be through a cohort of Super Angels. You will be looking at writing INR20-25L cheques in 8-10 deals over roughly one to two years, amounting to a corpus of over INR2 crores. These are fast-moving deals, and sometimes rounds get closed in a matter of hours, if not days. 

The hiccup? Oftentimes, these super angel groups may act like a clique. It can be hard to get an introduction unless you are seen as someone who is a startup operator / successful founder and routed through an existing close associate. These cohorts may be loosely formed, but retain a high level of exclusivity. 

A second way to get involved is to become a part of an angel syndicate. Typically, this would require setting aside at least INR50 lakhs that you can shell out for small-ticket cheques (roughly INR5-10 lakhs)in a minimum of 8-10 startups. You cannot invest in 2-3 startups and expect magic. Before we double click, it’s important to note that these are high risk investments – so it should be money you are willing to write off. 

For angel investing, one can consider any of the syndicate platforms like Angel list, Indian Angel Network, LetsVenture, Anicut Capital or local groups like Chennai Angels etc. A syndicate is a great vehicle if you want to learn about everything related to investing –  be it evaluating or negotiating valuations. It is flexible enough to allow you to pick selectively from a variety of deals. 

If you decide to go with a syndicate, make sure you join and wait for six months before committing to any investments. After 6 months of observing and learning how to evaluate, it is a good idea to start with a few passive investments – where you invest, watch and learn.  

How do you pick when you are just starting out? One way to pick is by  carefully observing and picking leads/ angels who have a good track record of helping and building good relationships with founders. Leads have an intuition that comes from years of experience – so they have a good  hang of picking the right founders to back and just following their patterns could yield good results. 

Alternatively, one could also follow microfunds that run syndicates – like Better Capital, Whiteboard, Titan, PointOne, 100x entrepreneur etc. These micro funds do a good job looking out for opportunities and hence you get a filtered set to evaluate. 

Another strategy could be to invest in sectors that are in your area of expertise or are in close proximity in terms of geography – so you can actually be more involved/ meet with the founders in person etc.

After you make a few investments, you can progress to ‘lead’ an investment – which means you pick the investment, take a board seat, and are responsible for the exit of other investors- the learning here can be enriching. 

How can an individual investor help a startup? Various ways – opening doors to potential clients, helping with interviewing senior talent, referring talent, helping with finance 101 which becomes crucial at a later stage, ensuring the team is building tech that is scalable, helping with organizational designs/culture, GTM,  helping with negotiating with early stage VCs, and so on. Early stage founders need a lot of help and angels can play a pivotal role in this phase.

The biggest challenge with syndicates is the number of options in such a setup is overwhelmingly large, and there is a risk of making the wrong choice if you don’t pick the right leads/ angels/ micro VCs/ sectors. 

To sum up, there is no doubt that every HNI should have exposure to the Digital India wave. However, it is prudent to first decide on the objective before one decides to invest in this asset class and then allocate funds with a long term strategy in place. It is wiser to stick to sectors you understand for direct investments and spend time learning about the ecosystem before writinģ your first cheque – be it through a fund or in a startup.