Headstart has been one of the largest startup organisations in the country ever since we came to be. Over 13 years, we have built a wide network of over 4000 startups in 50+ cities, we finally unveiled our plans to launch Headstart’s Investor Circle.
Appealing to a community of next-gen investors who want to be investors, we organised a series of Startup Investing Bootcamps. The first of which was organised on December 5, and saw Prajakt Raut, Applyifi, and Paresh Gupta, NEOS Angles & GCEC, talk about the basics of investing in startups.
Prajakt, with 30+ years of experience, talked about what it means to be an angel investor and why that is an interesting investment opportunity. Right off the bat, Prajakt made it clear that “Investing in Startups can provide risk-adjusted returns.” Provided, of course, the investor follows the portfolio approach, where one makes 10-12 investments in the span of 2 years. You can’t just invest in 2 exciting projects but invest in a wide array of projects, because no matter how exciting they look, there’s no predictability in terms of what succeeds and what doesn’t.
He also very strongly believes that newer investors shouldn’t listen to the media when it comes to investing as they tend to report on the extremes. There’s a lot of activity that happens in the middle and that is where you need to capitalise.
Investing for Beginners
Investing in Startups can be very profitable only if you’re able to work with them from the beginning, or simply, pick them early. You have to sniff out the ‘what-if’ potential of the startup and also be able to not only categorise it as a big business opportunity but also answer why you feel that way.
For new investors, investing through networks (like the Headstart Investor Circle ;)) is a great stepping stone into the actual world. However, if you have the skillset and bandwidth for equity investing, then there is no harm to doing it on your own. But if you don’t, then there is no harm in mutual funds. Startup investing requires a lot of time and effort, you’re sorting through 100s of applications only shortlist 1 or 2 every quarter.
As we’ve spoken about earlier, a portfolio approach helps. Some of your startups will fall however, the ones that do super well will make up for all that you lost. But, that doesn’t mean you invest in any 10-20 companies, you need to study the market in a way where you invest in the companies that you believe would be the most relevant to the next round of investors after you.
Unlike real estate markets, where there’s a fair amount of liquidity, investing in startups requires you to think long term. In the sense that it will take you anywhere from 5-7 years to be able to sell your share, for a significantly higher price. No matter how the media plays it, it will take close to a decade for a startup to be a full-fledged company or successful in their area. So, getting in early is important because that’s also when the valuation will be at its lowest and so in the future, you will be able to maximise returns.
Where do I invest?
Prajakt also said that investments shouldn’t be made on the basis of hype surrounding a particular domain. Those sectors although look promising are hypercompetitive. “Don’t invest in things that look like a great product.” He talked about how you should only make an investment when you feel that someone else would purchase your shares in the future. Invest in those companies where you can see yourself get a 10x or a 15x return on your initial investment.
With the backing of an angel investor network, newer investors can effectively find good deals. Not only that, but the network helps you not only nurture the company of your choice but also helps in finding an exit from the company.
There are 5 questions Prajakt recommended that new investors answer:
1. Is there likely to be a 10x/15x exit opportunity for early investors?
2. Is the market large enough to have headroom for growth for subsequent investors?
3. Does the venture have a reasonably strong chance of being a dominant player?
4. Is their business case strong?
5. Is this something I can invest in? Is this something I can bet on?
What things do you need to consider?
It is also important to look at the business plan of your startup. This is to understand whether or not the entrepreneur has thought of everything. As an investor you should go for entrepreneurs who have a deep passion for their domain while also understanding the dynamics of the business you’re investing in- remember, you’re investing in a business, not a product. As a new investor, try and invest with other people to learn from them.
Look for competent teams and practical milestones but large aspirations. You should also look for teams with a focus in the initial phase. Companies that set a certain target for themselves and work towards it in the initial phase are setting up a very strong foundation for the future.
While at it, look for a strong implementation plan- things like, ‘How will they acquire their first 1000 customers?’ should be answered. The startup you choose to invest in should have clearly defined goals and tasks. Their plan also needs to be clear and should define what they’re going to do with the money. But most importantly, you should invest in a team that you can trust. Business plans are unpredictable and so having a great relationship with the team can help avoid failure or steer the company into success.
- Invest in a solid business that addresses a large market
- Invest in high-quality teams with large aspirations
- Invest in clearly defined plans with practical milestones
- Invest if there likely to be a 10x/15x exit opportunity for early investors
- “Don’t invest till you go back feeling ‘What a great concept. I think the market is large and the team will deliver.’