Investing In A Startup? 7 Things You Need To Look Out For
As we note a rise in the number of startups in India, especially Fintech companies, new opportunities for investments rise adjacent. With Fintech companies dominating the startup sector, given the increasing viability of the IT and financial world, there is also a trend among investors to invest in these Fintech companies given the promising trends in startups in India in this sector. Here are 7 things you need to look at if you're considering investing:
1. Investment domain
Having a sound understanding of the market the startup is operating in greatly reduces the risks involved in investing in startups in India. Understanding the domain of the product and service will give you a good idea of how to project the business’ potential success and failure. It will give you an idea if the model of the startup is viable for you to get your back as an investor.
2. Level of involvement required
The level of involvement required when investing in a startup corresponds to the type of investment. For instance, investment through a venture capital firm would have much less interaction with the startup team than in the case of an angel investor. In the case of angel investing, the investor gets a share of equity in the business, which enables them to play a role in the company’s decision-making alongside its leadership. So, it is important to hash out the level of involvement you want to commit to or want.
3. Timeframe of returns
Investing is a long-term process, and it takes years for investors to get a return. While some are comfortable waiting for more than 10 years for these returns, some others need them in a much shorter period. Looking at the startup’s burn rate during the initial years will give you an idea of how long it will take to get a return on your investment.
4. Track record of the leadership
The founders of a company and the team they hire are among the most important factors to look out for, especially when investing in a startup. It is important to look into their background in terms of their previous companies, experience, education, and how they contribute to the company.
5. Expected rate of return
While venture capitalists and angel investors are committed to seeing entrepreneurs succeed, financial returns are also necessary. Depending on the type of investment, it is essential to calculate the Return on Investment (ROI) of a particular investment to take the necessary steps to maximise profits in the long run. Angel investors typically expect an annual return of 30% to 40%. Since venture capitalists take on a higher degree of the risk, they also expect a higher degree of returns.
6. Use of funds
As an investor, it is important to investigate how, why, and when the startup will use your investment. This gives you an idea of the entrepreneur’s vision as well as competence. Review the salaries of the employees along with how much the founder(s) pay themselves. Try to see if the company has enough funds to utilise to be profitable in the long run.
7. An exit strategy
An exit strategy refers to how and when an investor should or may want to withdraw their investment along with any possible gains. Calculating a clear exit strategy is important while making any investment, especially in the case of a startup. For example, an angel investor needs to know when to sell their equity shares.
Figuring out the details and intricacies of how to go about investing in a start is tricky, but possible with the help of a proper wealth management course. >OAWA provides the first wealth management course in India of its kind by combining various resources to teach financial needs analysis and how to build risk profiles and study the market.