How To Invest In Startups? How Much Wealth To Invest In A Startup?

Retail investors should diversify their investments across multiple Startups and avoid investing more than 15% of their wealth in this asset class, according to Startup advisory and investment expert Pushkar Singh.

Manoj Singh
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Investing in Startups

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The buzz around Startups is on the rise in India and across the globe, with young entrepreneurs bringing new ideas and a problem-solving approach to the table, attracting support from a growing number of seed funds, incubators, angel investors, and venture capitalists. This trend has been further amplified by popular TV shows such as Shark Tank India and The Horses Stable, making Startups a common household topic.

India, being the world's third-largest Startup economy and home to over 100 unicorns, has become an attractive destination for both new and traditional investors in Startups. From venture capitalists to corporate and government schemes, good Startups are receiving investments from a variety of sources. However, the question remains: 

How To Invest in a Startup?

Investing in Startups can be a lucrative way to diversify your portfolio and potentially earn outsized returns. However, it's important to understand the risks involved and how much wealth to allocate to these illiquid investments.

Investing in Startups: Tips from a Startup Advisory and Investment Expert

According to Startup Advisory and Investment Expert Pushkar Singh, retail investors should diversify their investments across multiple Startups and avoid investing more than 15% of their wealth in this asset class. Singh suggests that individuals should first build some wealth and only then consider investing in Startups. He recommends a threshold of ₹1 crore ($120,000) in liquid investments like fixed deposits and listed equities before diversifying into Startups.

Singh's advice is supported by the fact that shares of most Startups are illiquid and difficult to sell, making it challenging for investors to exit their positions quickly. While some online platforms are emerging to facilitate the trading of Startup shares, they are still in their infancy.

Also Read: Bootstrapping Your Startup; 10 Steps To Success 

Furthermore, most angel investors make money on their investments when a Startup raises a big round from a venture capitalist, typically $10 million or more. In such cases, the incoming VC sometimes buys angel investors' shares in a secondary transaction. However, most Startups fail before they reach this stage, emphasizing the importance of diversification across multiple Startups.

Also Read: What Amount Of ESOP You Should Ask For While Joining A Startup? 

Startup Investments: How Much Should You Allocate and When?

While the 15% wealth allocation and ₹1 crore threshold are good rules of thumb, they may vary depending on an individual's age, risk appetite, family wealth, and other factors. Younger individuals may be able to start building their Startup portfolio sooner, while older individuals may want to create a larger nest egg before investing in illiquid assets like Startups.

It's important to remember that Startup investments are inherently risky and require a long-term horizon. Startups are often in their early stages and may not have a proven track record or established market position. Investing in Startups requires careful research and due diligence, and even then, there are no guarantees of success.

Also Read: Startup Failure Rate; Startup Idea To Failure 

Startups as a Wealth Building Strategy: How Much to Invest and When to Start

That being said, Startups also offer the potential for outsized returns. Some of India's most successful Startups, such as Flipkart, Paytm, and Ola, have produced significant wealth for their investors. The Indian Startup ecosystem is thriving, with over 100 unicorn Startups and numerous venture capital firms and angel networks actively investing in promising ventures.

Retail investors interested in investing in Startups can explore angel networks, online platforms, and government schemes that facilitate investments in Startups. Angel networks like Indian Angel Network, Mumbai Angels, and LetsVenture provide access to a curated selection of Startups and offer support and mentorship to their portfolio companies. Online platforms like Groww, Upstox, and Paytm Money enable individuals to invest in Startups through mutual funds or other investment vehicles.

Also Read: How To Raise Seed Fund For Your Startup? 

Diversify, Build Wealth, and Invest: A Path to Angel Investing 

Government schemes like the Startup India Seed Fund Scheme and the Fund of Funds for Startups provide financial support to Startups and encourage private investment in the sector. These schemes can offer a lower barrier to entry for retail investors interested in supporting early-stage ventures.

Thus investing in Startups can be a rewarding but risky endeavor. Retail investors should approach these investments with caution and diversify their portfolio across multiple Startups. While the 15% wealth allocation and ₹1 crore threshold are good guidelines, they may vary depending on an individual's circumstances. With careful research and due diligence, retail investors can participate in India's thriving Startup ecosystem and potentially earn outsized returns.