Why I Invest In Both Startups And Listed Markets

I am an active investor both in the listed space, as well as in startups; and as an angel investor, I have a soft corner for social impact investing.

Lots of my friends in the share market don’t understand why I want to invest in startups. They feel the listed space is far a better option because there’s much more data about the companies you select. Because you make well-informed decisions, your returns are likely to be far better. After all, value investing has a long track record of both safety as well as profitability, provided we follow the right process.

Given the fact that the listed space in India can give such good returns (especially in small caps, where the market is not efficient) – why would one want to invest in startups which are completely opaque, full of uncertainty, lots of risk? Their concern is that I am being immature and am just throwing my money away because angel investing has become a fad!

This is a valid criticism, but we need to remember that maximising their return on investment is not the only metric people consider when choosing where to invest their money.

Now this doesn’t mean that I’m trying to throw my money away – it’s just that there are other variables I consider when deciding how to deploy my money. The basic rule for sensible wealth management is rational asset allocation, and I only invest that quantum of funds over which I will not lose any sleep over in startups, which means I am managing my risk thoughtfully.

The reason I have a soft corner for angel investing is that the major problem with the public listed space is that it’s completely soulless investing. Ultimately, it’s just numbers, and while it’s great to see your bank balance increase, it doesn’t give you much personal joy.

Why Startups Make Better Investments

With a startup, on the other hand, you can actually help the founder to grow his company, which can be very exciting. You also establish a one-on-one personal relationship with clever entrepreneurs, which can be very gratifying, because they teach you so much.

One of the important reasons I invest is because I want to get smarter about the world, and my learning agenda is extremely important for me. In the listed space, you’re completely distanced from management decision making, and you don’t get a chance to engage with the executives, who remain faceless suits. With startups, you get a chance to influence the future of the company, and this can be very satisfying.

Angel investing is not a get rich quick scheme for me. We try to actively engage with our founders and add value to their life, so we grow along with them. Yes, the risks are higher, but then so are the potential returns – both financial and emotional.

My startup investments are long-term and ill-liquid. They are a key part of my diversification strategy, since their returns are usually completely uncorrelated with what’s happening in the markets.

I also hope that these two sets of investments will create a positive virtuous cycle over time. Our insights into how good companies are valued in the share market help us to guide our startup founders about the importance of establishing good corporate governance and creating a healthy company culture; while our founders give us valuable scuttlebutt about how the listed players in their specific domains are perceived by insiders.

Social impact investing gives me a chance to leave the world a better place.

Lots of people get confused, and say, “If you want to do good for people, then why don’t you do charity or philanthropy? Make money by investing in the listed space, and then give your profits away to good causes.” From my point of view, investing in social startups is far more sensible. You want these to grow and become self-sustaining, so that have a long-term impact. The big problem with charity is that the results are temporary.

If we understand that return on investment is not measured solely in terms of money, angel investing can be very profitable!

[This post by Dr. Aniruddha Malpani first appeared on LinkedIn and has been reproduced with permission.]

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