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GUEST ARTICLE: Is investing in start-ups viable in the post-covid era?

Most investors invest in this space to use the generated profits to meet their operational costs.

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Mumbai: The internet has boosted the startup scene all over the world, including India. Many homegrown startups have not only attracted a good customer base but are seeing investors of all sizes plug their money at different stages of the startups’ expansion in their respective markets.

Here’s why the startup space is a priority asset class for most domestic investors in the modern era.

Investing capital for increased returns is critical in everyone's life, especially after the covid-19 pandemic loomed uncertainty by rocking the global financial markets. As the investment sphere is heavily sentiment-driven, the massive job losses, slashed incomes, and irregular business cash flows led to the crash of indices on the back of arrested investments and demand for liquid funds.

The investment sphere is slowly regaining traction on the green side as we steadily put behind the adverse effects of the pandemic. In these times, the hot topic for most has been investment in the startup space. As India builds its way toward increased adoption of digitisation, most startups in the digital sphere have thrived as their investors and customer base are all here on the internet, irrespective of their physical presence.

So, why are so many startups in India succeeding in attracting investors of all types at various stages of their funding requirements?

High Reward Potential – With a small capital fund investment, the returns can be subsequently 2x-10x basis of the scale at which the startup is attracting customers. Though they are high-risk assets, an investment in a startup can be highly rewarding. Take for instance Google which was a startup once and led its path to go public and raise $500 million for early-stage investors. A whopping return on investment is what startups are known for among investors.

Change-maker – Most startups have principles that state how the firm strives to bring about an adaptable change in society, leading to the betterment of the environment and promoting sustainability. See, for instance, how most startups have been operating digitally instead of with brick-and-mortar stores, which subsequently reduces their carbon footprint. They regularly measure and report about their emissions and the means to bring them down through their learning.

Side hustle – As the invested capital keeps giving good returns, most investors invest in this space to use the generated profits to meet their operational costs. As a result, for many investors, investing in startups is a side hustle.

Gain market recognition – Being a part of the start-ups’ journey, as an investor, you get the chance to meet several industry veterans who are likewise investors, board members of the company, or just meet several industry experts at many forums where all of them come together. As an investor, you stand a chance for increased recognition in the market.

Early investing – Saving from shelling out more capital for a larger share of the startup, early-stage investing often helps the investor reap better and higher returns when the start-up starts to thrive. One must be mindful of the amount of investment in any startup, while also being mindful that the model is subject to failure.

Diversifying your portfolio – As many investors park their capital in stocks and share markets, in a bid not to fall prey to the market volatility risk with their investment every time, they can consider investing in a startup. While a startup is too subject to market risk due to demand-supply fluctuations, etc., they are not as sensitive and are affected daily by the shift in market dynamics. They are focused more on targeted sectors, so the risk of fluctuation in the investment is lesser. It thereby diversifies one’s investment portfolio. Invest in 10 different start-ups in 10 varied categories for a dynamic understanding and diversification of your portfolio.

High potential for buy-outs – A startup, on the back of its high performance and high returns can be subject to be acquired by any of the investors eyeing to take control of the operations. Offering fair compensation for the acquisition, as an investor, one can potentially see the brighter side of capital gain with the buy-out of the startup/s that they have invested their money in.

While it cannot be denied that startups are subject to failure and there’s a risk of your investment getting razed altogether, there’s risk in your investment in the stock and share markets, real estate assets, gold, and other bonds. Why not put your hands in and get a first-person experience of how investing in startups works?

The author of this article is Om Dayal Group founder Sanjiv Agrawal.

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