- How riskier is equity investment in startups as compared to other traditional modes of investment ?
The other traditional modes are: Real Estate, Gold, Share Market, Mutual Funds. It’s common knowledge that expectation of return comes at the cost of risk, hence fixed deposit is not considered here. All the other modes are risky and their success is subject to market conditions.
Its also common knowledge that 99 out of 100 startups fail. And hence risks in startup investment are very high. But if you know which the successful 100th startup is, or you go through 1000 startups and select only 10, the chances of your success increases and risks decrease significantly. Moreover, if you add risk mitigation techniques, such that there is a decent return in case of an expected failure as well, you are in a much better territory than mutual funds.
If compared with real estate, there are many viewpoints that a real estate startup investment may yield better results than real estate investment with almost similar risks. Our view is that only selected real estate startups fit the bill. Risks are low for selected few while being very high for the rest. Also, returns can be multiple times higher from these selected few.
- Are there any major startup success stories in India or elsewhere for investors and LPs ?
Success stories are abundant in the US as well as China. In India, success stories are in the process of being formed. But if we calculate success as something which gave a decent exit to its investors, there are a number of such examples in India as well, which include and are not limited to startups such as Freecharge, Redbus and so on.
- Who are the type of investors who generally invest in startups ?
Individual investors in startups are called angels, and currently angels are experts from the ecosystem. But there are multiple modes opened by government approved agencies which allow regular and traditional investors to become part of the startup investment world as well.
- What is the difference between angel investment and investment through VC firms (such as Idein Ventures) ?
Angel investment is the term used for investments by individuals directly in a startup. Angels typically review the startups themselves or take the help of angel networks in due diligence before investing in a startup. After investment, they may get involved in the functioning and will have some direct control.
Investment through VC firms is where investors put the money in a common pool which is used by a fund manager in various investments. Investors in such cases are called LPs or Limited Partners.
Idein Ventures is a VC firm but works with certain unconventional techniques. It maintains complete control over the startups in which it invests, unlike traditional VC firms, and takes care of every aspect related to funding and startup management on behalf of the fund. More details can be known by contacting us directly.
- Is equity investment mandatory for growth of every company? There have been success stories before such investments became fashionable.
Equity investment has been there since quite a long time, and the new emerging trend is to invest in technology startups. VC investment is simply a subset of PE investment which has been quite common. But such investment is not mandatory for growth, there are other forms of raising money such as venture debt or debt from banks. Equity investment becomes the best mode of raising funds if a company doesn’t just need money but also a partner. And equity investments are bound to give much higher returns than any other mode.
There are some companies which do not raise any external money as well. Such companies are growing and can grow, but they can grow confidently towards being a market leader, only if they have created something which no one else can. And this is tough in this current world of competition. That’s why external equity investments are needed to create unicorns (unicorn is a slang used to identify billion dollar companies).