“I see startups, technology and innovation as exciting and effective instruments for India’s transformation.” ~ Shri Narendra Modi
Since the announcement of “Start-up India” scheme by Prime Minister Narendra Modi in his 2015 Independence Day Speech, there has been a lot of buzz among the small entrepreneurs, investors, VC’s, and management groups leading to a new era of startup evolution in India. To begin with, India is the world’s youngest start-up nation with 72% young founders who are less than 35 years old. The “Start-up India” campaign further shows the Indian government’s intent in understanding the value of startups and boosting innovation culture in a youthful and emerging economy. This thrust in the Indian startup systems holds great promise for every sector, especially for the crucial areas of education, healthcare, employment, and agriculture.
The action plan for start-up India promises an abundance of benefits to innovation driven ventures including funding support through corpus of INR 10,000 crore; credit guarantee fund for Startups by the govt.; tax exemption on capital gains of Start-Ups; complete tax exemption to Startups for their first 3 years; and further tax exemption on investments above fair market value. Besides the financial support “Start-up India” provides for the development of several Incubators and other support systems needed for start-ups to flourish.
India has come a long way from the initial days of bootstrapping when the major chunk of the initial investment for businesses came from the initiator’s personal saving, and support from friends and family. But with the advent of government initiatives promising incentives for start-ups to lay the company foundation, the role of the investors would also be extremely valuable. The actual impetus that propels a young enterprise forward is the infusion of necessary funds into its system either by the Angel Investors, venture capital funding, ultimately leading to generation of funds by private equity means and finally launching IPOs. Keeping the above in mind, the total funding in Indian startups was estimated to be close to $5 billion by the end of 2015.
Investing in startups is quite uncertain and can prove to be a risky affair, especially when the idea doesn’t take off as planned leaving the investor stranded and penniless. Having said that, there is absolutely no doubt that investing in a start-up can also be very incentivizing as well. The reason why an investor needs to be extra vigilant while pouring in his bit into a start-up is because such companies are saplings playing with ideas looking at a prospective product, which in most cases don’t have a commercially tested product or solid customer foundation. Therefore, the start-up investor must critically evaluate the business plan and the model for generating profits and growth in the future.
- Broadly the essential things that must be pondered upon while looking to invest in start-ups should be: evaluation of suitable risk
- likelihood of profitability
- equity stake available in exchange for capital
- market evaluation especially checking the viability of competitors
- legal and regulatory compliances
Before investing in a start-up one must ascertain the domain of startups that they might be interested in and then zero down on the company that deserves the investor’s money.
Three aspects of a Start-Up must resound the philosophy of a start-up investor:
- Intellectual potential; and
- Individuals contributing to the Start-up.
After deciding on what company to invest into, one must ascertain the timing and type of entry into the system. Depending on the equity share and willingness to be a part of the decision-making, types of participation can be grouped as angel investment, venture capitalist or crowd-funding. It is also important to evaluate the potential return on investment (ROI) and time frame needed to maximize the profits.
Taken the other way around, when a start-up holds an original product/service but does not adequately safeguard their respective IP; then markets such a potent product without developing a strong IPR strategy to monitor and back up sales, not only does it expose the product to plagiarism but also loses out on precious market share and boosted sales due to loss of originality.
Besides the above listed “diving in” investment considerations, an investor should also chalk out an exit plan. A healthy exit strategy is very important for an investor since it is imperative for them to known the time frame when one would be able to withdraw the initial investment and its related profits.
In the end, an investor must remember that investment demands patience and one should be more oriented on the long term prospects rather than short term gains in order to maximize output. Also, as they say, “Don’t put all your eggs in one basket”, the sound investor always focuses on having a diversified investment portfolio. The more the diversification of your startup investment, the greater are the chances of hitting gold in a relatively short time-frame.
~ Happy Investing!
Article By: Vineet Sharma – Vice President (Patent Analysis)