Who Are Startup Investors?
A startup investor is someone who puts a certain amount of money or capital into a business with the expectation of receiving financial returns.
Angel investor networks, banks, government agencies, venture capitalists, family offices, incubators and accelerators, individual investors and institutional investors are some of the most common examples of investors.
How Do Startup Investors Make Money?
Investors have various ways of generating income and profits from their investments. Here are some common methods:
- Capital gains: Investors make money through capital gains when they sell an investment for a higher price than what they initially paid.
- Startup investments: Investors in startups primarily aim for capital appreciation. As the startup grows and succeeds, the value of the investor’s shares increases. They can sell their shares at a higher price, thereby making a profit. Additionally, investors may receive equity in a startup, which can increase in value as the company grows.
- Exit opportunities: Investors in startups seek exit opportunities to realise their gains. This can occur through an initial public offering (IPO), allowing investors to sell their shares on the stock market. Another exit option is through mergers and acquisitions (M&A), where investors may receive a payout when another company acquires the startup.
- Convertible notes and debt instruments: Some startups raise funding through convertible notes or debt instruments. In such cases, investors may receive interest payments on their investments. They may also have the option to convert their debt into equity at a later stage, allowing them to benefit from potential future growth in the startup’s value.
What Are The Common Investment Strategies For Startup Investors?
- Investors can choose to invest passively and actively. In passive investing, investors hold stocks for longer periods. In active investing, investors frequently buy and sell for higher returns.
- Investors can choose short or long-term holdings based on a company’s growth potential they are investing in.
- Investors look out for undervalued companies and after anticipating their value to rise in the future, they accordingly invest.
- Dividend investing is when investors look for stable companies that have a proven record of consistently paying dividends.
What Are The Risks Associated With Startup Investing?
- Market Risk: Economic downturns can affect startup investments, resulting in a loss of value for the investor’s investment. This risk applies to stocks, bonds and foreign investments.
- Liquidity Risk: There may be difficulty in selling startup investments quickly and at a fair price, which can impact the investor’s ability to realise returns. Startups often have limited secondary markets, making it challenging to sell shares.
- Concentration Risk: Investing in a single startup exposes the investor to concentration risk. If the startup fails or underperforms, the entire investment may be lost. Diversification across multiple startups can help mitigate this risk.
- Credit Risk: When investing in startups, there is a risk that the company may be unable to repay the interest or the principal amount. Startups typically have higher default rates than established companies, increasing the credit risk for investors.
- Reinvestment Risk: Reinvesting returns from startup investments can come with the risk of earning lower interest rates. This risk arises from changes in market conditions or the availability of attractive reinvestment opportunities.
- Inflation Risk: The growth of startup investments may not keep pace with inflation, resulting in a loss of purchasing power over time. Inflation erodes the value of returns, potentially diminishing the investor’s overall wealth.
- Forced Selling Risk: Unforeseen events or financial emergencies may compel investors to sell their startup investments earlier than planned. This premature sale can lead to losses if the market conditions are unfavourable at that time.
- Foreign Investment Risk: Investing in startups based in other countries introduces unique market risks and uncertainties. Political instability, currency fluctuations, and regulatory changes can impact investors’ returns.
How To Become A Startup Investor?
All budding investors must begin with the understanding that investing is a journey that requires immense patience that has multiple trials and errors but presents a learning curve. Before becoming a startup investor, educate yourself on the fundamentals of the sector and startups you wish to bet on.
Define your investment goals with clarity and create a long-term investment plan to mitigate the repercussions of hasty decisions. Also, assess your risk appetite and diversify.
Who Are The Top Startup Investors In India?
According to Inc42’s analysis, some of the most active startup investors in India are:
- 3one4 Capital (VC/PE Firm)
- 100X.VC (VC/PE Firm)
- Aavishkaar Group (VC/PE Firm)
- Accel (VC/PE Firm)
- AdvantEdge Founders (VC/PE Firm)
- Agility Ventures (VC/PE Firm)
- ah! Ventures (VC/PE Firm/Angel Network)
- Alteria Capital (Venture Debt Firm)
- AngelList (Angel Network/Platform)
- Anicut Capital (VC/PE Firm)
- Ankur Capital (VC/PE Firm)
Why Is Diversification Important For Startup Investors?
Diversification is an investment management strategy that lowers investment risks wherein investors put in money across different assets while simultaneously building their investment portfolio.
Diversification is important for investors. After all, it reduces investment risks because each of the investor’s assets comes with its risks and value. This means that not all assets will bring loss during negative events, while some could remain stable. This helps investors to balance maximising gains and minimising losses.
How Can Startup Investors Mitigate Risks?
Although it’s almost impossible not to expect any risk when it comes to investment, there are some strategies to minimise them.
- Before conducting thorough due diligence. Check how the company’s management is doing and what its debt-equity ratio looks like. This fundamental analysis gives a peek into the company’s future performance.
- Ensure there is sufficient liquidity. This means that an investor must have enough accessible cash as an emergency fund to cover expenses for about 9 to 12 months to avoid selling investments when the market is down.
- Monitor the performance of your portfolio now and then. This does not imply that investors must make a change every time they monitor their portfolio as investments can be unpredictable.
- Focus on the market fluctuation with patience and don’t exit quickly for profits. Instead, let your money grow steadily for good returns.
What Is The Role Of A Financial Advisor In Startup Investing?
An investor can hire a financial advisor, a professional with expertise in financial management. A financial advisor assists in various aspects of financial management, including assessing and optimising savings and spending habits, offering investment guidance, managing investment portfolios, and providing tax advice.
How To Understand Startup Investor Mindset?
Investor mindset has subsequent effects on the markets. It highlights that investors can be influenced by their own biases. Some of the top biases are as follows
- Confirmation Bias: Investors favour information that aligns with their existing beliefs and ignores contradictory evidence, leading to potential financial mistakes.
- Overconfidence Bias: Investors with average prediction believe they are better at predicting outcomes face excessive risk-taking and overestimate investment returns.
- Herd Mentality: Following other investors without due diligence can lead to poor investment choices influenced by the actions of others.
- Loss Aversion: Investors who fixate on losses rather than celebrating gains are overly cautious to take necessary risks.
- Anchoring Bias: Relying on initial information or past experiences that may not be relevant to the current situation can impact their investment decision.
- Recency Bias: This occurs when investors base their investment decisions on recent occurrences and news, often overlooking the fact that these are temporary situations and will change at some point.
- Availability Bias: Investors who make decisions based on readily (possibly half-baked) available information rather than relying on due diligence can potentially overlook better investment opportunities.
- Endowment Effect: Investors who overvalue the assets in comparison with the market value can make uninformed selling or buying decisions.
