SUMMARY
Angel investing is NO more a territory of only the super-rich
Increased startup liquidity and infrastructure and tax implications for investing have been removed
95% of gain is made by the time companies get listed for public
The world is evolving faster than ever with technology pervading into each aspect of life. And in an increasingly open-knowledge society with favourable access to capital, it is the new-age lean companies which are likely to shape and have a far greater impact on the business & economic landscape than traditional businesses.
Pointing to the same, internationally is a study as per which the average tenure of companies on the S&P 500 was 33 years in 1964 which had reduced to 24 years in 2016. It has been forecasted to shrink to just 12 years by 2027, with PE/VC investments and growth of billion-dollar valuation startups leading the change.
Thus, in such a dynamic world, it is imperative that one must be open to new ideas and investment vehicles if wealth-generation is the goal! With easier rules and a liberalising regulatory regime, investing in unlisted companies i.e. early-stage ventures is a very useful avenue for wealth-generation.
In fact, if done well, it has the potential to make outsized returns which far exceed the returns on other types of investments.
Below are 7 reasons highlighting the same.
No Other Asset Class Giving Good Returns
Real estate & equities have given below 5% returns
The traditional investment products promise a safe and steady return. But these are seldom enough to beat inflation over a long-term, leave alone enable wealth generation. Below is a comparative illustration of some of the most popular financial options in the last 4-5 years.
Food for thought – India’s real GDP growth rate has been ~7% each year during the past 4-5 years. However, this isn’t reflected in property prices rise or business revenue & profit growth (and hence below-nominal GDP share price returns). Is it that a sizable chunk of the GDP activity is now taking place amongst unlisted companies, i.e. the new-age startups?
Comparably, angel investing in startups as an asset class will be a good diversification of portfolio and will have the potential of giving superior returns. In these investments, you are much more in control of your investment as compared to other asset classes. You can also grow it further by investing your time and mentoring to grow the
Startups you have invested in. One successful angel investment can give you a lot of financial freedom which everyone aspires for.
No Recession In Startup Funding
There is strong capital inflow signaling growth
Contrary to the Public markets, where IPOs have dried up in the past two years, the startup funding scenario continues to blossom in India. In fact, apart from a dip in 2016, funding has increased each year from the previous one this decade. Even in 2019, in the third quarter startups are estimated to have raised a total of $2.55 Bn, almost 25% more than the $2 Bn and $2.13 Bn raised in the preceding two quarters.
The acquisition of Flipkart by Walmart last year was the 1st mega exit for angel and early-stage investors that provided a validation of the funding and market potential in India. In a continuing sign of maturity of the ecosystem, there are continuously greater sums of money being raised in later rounds by established startups.
Angel Investing Is NO More A Territory Of Only The Super-Rich
The threshold has gone low and is much easier
Angel investing is a wonderful way to add a high-risk, high-return asset class to one’s portfolio, and is absolutely critical to progress towards wealth generation in the longer run. It’s not just the super-rich who have the opportunity to invest in startup businesses, but it is now easier than ever for working professionals or employees of private-sector organizations to be able to evaluate and invest in startups in a transparent and convenient manner.
With angel investment networks abound in the country, the costs involved in investing are getting lowered drastically. Not only do most angel investment groups handle the entire legal documentation and coordination with invested startups, but the minimum ticket size is also fairly low as the overall investment is effectively money pooled from multiple sources.
Catch Them Young
95% of gain is made by the time companies get listed for public
In the 80’s and 90’s the most value creation in the US happened for those investors in the Public market, who bought stocks in tech giants like Amazon and Microsoft after they IPO’ed. Now, however, the private equity space is more robust and fruitful for businesses.
Most of the value creation has shifted to early-stage private company investors. In fact, if one were to wait until a startup went public to invest, they could be missing out on 95% of the gains, which are often accrued by investors before the IPO.
*Source: Funders Club
Similarly, the behemoths of the Indian startup ecosystem (Flipkart, Paytm, Ola etc.) have given manifold returns to its early-stage investors. And most of these leading Indian startups, the new-age technology-fueled corporates are yet to even enter the public markets. But this does not mean the best time has passed. In fact, it’s only starting, and for a young country like India, the best years are certainly ahead of it.
Pro-Entrepreneurship Regime
Increased startup liquidity and infrastructure and tax implications for investing have been removed
There is a great scale of technology with the prevalence of high-speed internet/devices and mobile penetration as compared to the heydays of the startup ecosystem in India a decade ago. Not only the access for investing in startups was limited earlier, but the startups themselves were growth constrained because of regulatory challenges, lack of infrastructure, acceptance of business models and access to capital. Whereas now, the startup ecosystem is getting bolstered with each passing day.
In this first decade, entrepreneurs of India have tasted blood (read ‘success’). With our young population and multitude of existing challenges (read ‘opportunities’) in the country, the path is set for the startup story to grow manifold in years ahead.
As the saying goes, “there’s no better time than now to start investing and ride this growth story.”
Stay Relevant To Latest Technologies And Be Part Of A Strong Network
Technologies and Startups go hand-in-hand when it comes to incorporating the latest advancements in the current market. Relevance is another factor that adds more gravitas to the service/product being developed by startups in almost every sector.
Furthermore, the use of the latest technological developments leads to cost-effective benefit for the business. As compared to the large service providers, startups are more flexible in implementing appropriate new technologies that meet the business requirements.
Another important aspect of working closely with startups is that you understand the present-day challenges being faced by businesses and also learn the art of setting it up from scratch. This also sets the foundation for your upcoming business ideas.
Association with Angel networks also helps you to develop long-lasting relationships with like-minded individuals, which can be super helpful for your own professional and personal growth.
Contribute To Nation-Building, Job Creation And Growth Of The Country
By 2020, India will be the third-largest base to startups after the US and the UK, with more than 11,000 startups in the country. Through both words and actions, the top-most echelons of the government have lauded and promoted entrepreneurship. And the Prime Minister of the nation, Shri Narendra Modi has repeatedly extolled its virtues, “I see startups, technology and innovation as exciting and effective instruments for India’s transformation”. However, our startup ecosystem needs a lot of development to increase the success probability of startups.
By supporting new entrepreneurs you can play a major part in shaping leaders of tomorrow through your experience, mentorship and guidance. This will help the economy in which more jobs will be created, and hence you will contribute to nation-building in your own way.
Most seasoned angel investors confess that investing in a startup and riding its journey teaches much more than learning one gets in their regular job. If you have the risk appetite, don’t miss out on this asset class for the sake of convenience with an old investment instrument. To quote Robert G. Allen (Author of ‘The One Minute Millionaire’),
“Thriving investors don’t play it safe. How many millionaires do you know who have become wealthy by investing in savings accounts?”
The Onus is now on you to act!
The article is co-authored by Sumeet Kapur, cofounder at Inflection Point Ventures and Madhukar Bhardwaj, business analyst at Inflection Point Ventures.
