5 Factors You Should Check Before Investing in a Startup as an HNI

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A survey conducted among 1000+ participants of age groups 16 to 64 in 2018 by think tank Ipsos revealed that 40% of participants had jumped on the enterprising bandwagon in the past 3 years, and 39% of them are considering venturing into starting their own business in the next 4 years. This and several other peer reviewed statistics indicate the sharp growth in the interest of the Indian populace to start a business of their own, and thus it is only natural that as an affluent investor, you might witness an increase in approach from startups seeking your investment.

Source: Statista | Share of people who started their own business in India as of September 2018

But should you instantly whip out your cheque book and make a generous offer at the first chance you get?

Probably not, and thus in today’s post, we will share with you a listicle of 5 factors you should consider before investing in a startup.

1. Understanding the Business Proposition

One of the first and most important steps you should invest your resources into is thoroughly understanding the business proposition of the startup in context. Although most business plans appear to have the potential to succeed in the long run, this might not always translate into reality, and thus, you should make an active effort to understand the business plan your investment can potentially turn into a reality.

While there is no dearth of potentially successful business plans, one area where most of them fail is execution, and thus it is suggested that you have a sit down with the founder and gauge the reality at hand, while simultaneously considering factors such as, do you share the same vision, does the current team have what it takes to pull it off, what are the potential risks associated with the plan and what is the founder’s perspective on risk assessment and mitigation?

These are the tough questions you ought to ask before proceeding.

2. Speak With Experts

One thumb rule of investing continues to be the anecdote that “invest in what you know and understand,” and this translates into investing in newly formed businesses as well. After you have collected the founder and the team’s input, approach a third party, preferably a seasoned investor or an investment banker who is aware of the industry.

Their experience from participating in similar opportunities will be invaluable in understanding the risks your investment opportunity arrives with and its chances of translating into success.

3. Market Opportunity

All the successful companies we know of, be it Zomato or Oyo, became a success because they identified a problem (market opportunity) and subsequently provided their users with an easy solution to that problem. Does the same scenario reflect in this opportunity?

While the law of economics dictates that demand can be generated from scratch, how viable is that approach?

You need to find the answer to these questions and if possible, hire a research agency to identify opportunities in the market of your concern, as this way you will be able to guesstimate if the said solution fits in the larger scheme of things.

4. Speak With Your Lawyer

Retail investments are one thing, but when it comes to seed investment, a whole new league of legalities are involved, and thus you should make it a priority to speak with your lawyer and go over each and every proposition and better understand what they entail for you. As a priority, you should make the best effort to protect your investment at the least possible cost.

5. Discuss Exit Strategy

Last but not least, every business should have an exit strategy for their investors, and you should discuss this at length with the founder and their team. Right from the timeline to the projected growth and milestones, everything should be explicitly discussed, such that you can better plan your investment portfolio in the days to come.

Ending Lines

The MSME sector in India has grown at an average rate of 18.56% YoY since 2016, and observers in the industry expect this trend to continue well into the future, making it safe to assume that you will have plenty of investment opportunities coming your way. So be patient, fulfil the above checklist and ensure that your hard earned money is safely invested.

Reference[s]

1. Funding A Startup by HDFC [Link]
2. 6 things an investor look for before investing in a startup [Link]
3. Share of people who started their own business in India as of September 2018 [Link]
4. WaterField Advisors [Link]
5. 15 Key Questions Venture Capitalists Will Ask Before Investing In Your Startup [Link]
6. 5 Questions to Ask Before Investing in a Startup [Link]
   MSMEs in India — Pad for the Next Economic Leap [Link]