Is Investing In Startups An Asset Class Or A Fad?
It’s been intriguing to witness a significant shift in the investor preferences for early-stage investing as an asset class over other traditional investment options erstwhile popular in the past
Amidst all the fanfare and the escalating buzz around the success of startups, the Indian startup ecosystem is witnessing a welcoming transition with regard to the investor mindset, a fundamentally critical factor for the success of the startup ecosystem in India. It’s been intriguing to witness a significant shift in the investor preferences for early-stage investing as an asset class over other traditional investment options erstwhile popular in the past.
Angel investing, an age-old practice of investing in familiar ventures as a network of friends and families, has evolved considerably over a period of time. The introduction of platforms in angel investing has disrupted the traditional angel investing practices across geographies. The platform-specific processes and collaborations are becoming a mainstay in identifying ventures with great potential in their nascent stages, and in garnering opportunities for funds and nurturing for the startups, thus enabling investors to secure investment avenues with impressive ROIs.
The early-stage venture investing signifies the initial stages of growth in the lifecycle of a startup, i.e. Seed to Series A&B, although the demarcation of different stages of growth is much more obscure now than before. It usually entails investment outlays to the tune of 50 L to 50 Cr, on platforms, for ventures that qualify requirements of holding the real problem-solving abilities as well as the potential to stoke up demands that are sustainable and scalable in the future, among others. Today an increasing number of investors, from Retail to Family Offices, and High Net Worth Individuals (HNIs) and Business Professionals are seen opting for allocating 5-10% of their money towards early-stage investing as an asset class in their investment portfolio.
Given the fact that 9 out of 10 startups fail to take off the ground through the initial stages of their growth, the early-stage investments are deemed to be high-risk investments. Nevertheless, a disciplined and diversified approach (5-10% of the overall portfolio) has the potential of the asset class to yield 25% upwards IRR on the overall portfolio.
“There is a growing craze among investors over hunting for Unicorns these days. You can never identify a Unicorn in a corporate journey of 7-8 years. It’s not a strategy, it’s a hope. Strategy is about how one can build a portfolio of 30-40 companies, and invest an equal amount in each one of them, doubling the amount of investment in successful ventures, while prolonging the exit, typically for 3-4 years. It’s an asset class that requires patience and a diversification strategy. We have seen on an average 35% of IRR playing out for us as a portfolio.” says Nandini Mansinghka, Co-Founder and CEO of Mumbai Angels, India’s premier platform for private investments, who believes that the longer the investors hold on to their assets, the larger their chances are for disproportionate gains.
In summary, while the early-stage investments as an asset class are gaining increasing popularity and occupying larger proportions in the investor’s portfolios steadily, it is important to gauge the risk associated along with the potential upsides. An approach of overemphasizing the whole potential and not the risk while hunting for Unicorns can be very taxing on the investor’s overall portfolio. Investors should start taking gradual exposure, invest via platforms rather than on their own and also finally, invest only that part of their wealth that they have not kept apart for emergencies.
(The given article is attributed to Nandini Mansinghka, CEO & Co-Founder of Mumbai Angels and has been exclusively created for BW Businessworld)
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