We all know that each startup that exists today starts small and then builds on it. This is the meaning of a startup is its essence. However, you cannot build big unless there are people to help you out. This becomes important when it comes to funding. Startups usually start with a small amount of funding which is generally founder’s funds. After that funding gets over, they need external funds to survive and grow in the market. This is where Startup Investment comes into the picture.
Startup Investors have a knack for investing in those startups that have the potential to grow well in the future. By investing their funds into a startup, they buy a piece of ownership in the business and accordingly earn returns on their investment. They make up the capital of the startup in exchange for the portion of equity.
‘Startup investors’ is a very broad term. Also, everyone cannot invest in a startup. There are only some entities that invest in the startup at different stages. All these entities have different identities and different criteria to invest. Some of the most popular investors are as follows:
- Accredited Investors: an accredited investor is the one who is allowed to trade in securities that are not listed or not registered with public financial authorities. Since they have access to such investment avenues, they generally have a sizeable amount of net worth, asset size, or net income or professional status. These include High Net Worth individuals (HNIs), Banks, insurance companies, etc. These people are financially sophisticated and are willing to take risks. In India, as per SEBI regulations, a business entity or institution that wishes to invest in a startup as an accredited investor must have a net worth of INR 25 crore. A net worth of INR 5 crore is required for an individual to be qualified as the same.
- Angel Investors: Angel Investors provide initial or seed financing to a startup whenever a startup founder runs out of their cash. They provide financial backing in exchange for the equity stake in the startup. These are generally riskier investments as the chances of survival of startups are low. Angel investors are focused on helping startups taking their first steps. Angel investors are accredited investors; however, it is not a prerequisite. Any person who has net tangible assets of at least INR 2 crore excluding their principal value of the residence and has an investment experience can be qualified as an angel investor. For a body corporate the same threshold limit is INR 10 crore. Angel investors generally invest through crowdfunding sites or forms networks online called Angel Investor Networks. Such networks connect different angel investors from all around the world. The network or the group then invests in the potential startups. Usually, experienced angel investors have a planned exit strategy. They liquidate their investments at
the time of acquisitions or IPO launch after booking a hefty profit. - Venture Capital: Venture Capital is a type of private equity financing given to startups and small businesses, which have the potential to break through. As the name suggests, it is the capital provided to new ventures which have grown quickly and appear to continue the trend. It may be monetary or in the form of managerial expertise. It can be provided at any stage such as seed, after seed, or at the expansion stage depending upon the maturity and profitability of the business. Venture Capital is a fund pooled from the contributions of HNIs, large investment bankers, big corporates looking to diversify their portfolios, and other financial institutions, who are ready to bear the risk of failure of the investment. They are generally out of the reach of retail investors. This fund is operated by a Venture capitalist who makes decisions regarding the selection of startups and the stage at which the fund is to be invested. They are experienced financial professionals who can take complicated decisions related to risk-reward ratio, exit strategy, etc.
Another term that might come to mind is hedge funds. Hedge Funds do not invest in the startups as such. Their basic aim is to hedge the market risk and create a higher than average return. They achieve this through unconventional trading strategies such as the usage of leverage and debt. They are financial market players and hardly operate in startup culture. Here we can conclude that Startup investors are not ordinary people. They are the people who can take risky bets and have some threshold amount of money. Today, this threshold has been lowered, thanks to the popularity of angel investor networks. More people can now invest in startups than before and diversify their portfolios.
If you also wish to invest in Startups, do check out our investor page and portfolio. You may likely find us a reliable entity in the Startup Investment world.
