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How to Invest In Start-Up Companies

how to invest start-ups companies

What are Start-Up Companies?

Start-up is a business or venture started by an entrepreneur to pursue a new and innovative idea and expand it into a profitable model. In other words, it is an idea that is brought into a business form. An entrepreneur would need capital to start a start-up. The money can be funded from family, friends, loan, self-funding, angel investment, venture capital, crowd-funding, or any other possible method.

What is Angel Investment?

Angel investment is when a person invests in the start-up and acts as a mentor and provides initial support by helping the investor handle any crucial or challenging situations with ease. Venture capital is similar to a broker in the share market. Big companies take money from investors and invest it in start-ups. It can amount to 1-5 million rupees. Crowd-funding is when a small amount of money is taken from a large group of people to start a business or venture.

JOBS (Jumpstart Our Business Start-ups Act)

In the USA, before Jumpstart Our Business Start-ups Act (JOBS), only wealthy capitalists could invest in a start-up, not a middle-class man. After Jumpstart Our Business Start-ups Acts, 2012, some federal securities regulations were relaxed. People could start investing in the business through crowd-funding. The new regulations favor individual investors. On the one hand, it allows the individual to get shares of start-up and, on the other hand, provides some rules to minimize the risk. A limit is imposed as to how much a person can invest in a period of 12 months according to the financial status of that particular individual.

When a start-up company becomes efficacious, along with the entrepreneur, even the investors gain a lot. It is also observed that it is beneficial for an investor to invest in a start-up in its initial stages. Start-ups are generally not tradable. That means a person cannot sell the share of investment he made in a particular start-up to someone else as the case is in stocks. However, after the start-up goes public or is acquired, the investor can then trade or sell his share.

Here Are Some Start-Up Investment Options

1. Angel Investment

when a person with surplus capital invests in the start-up and acts as a mentor and provides initial support by helping the investor handle any crucial or challenging situations with ease. Once the start-up grows to its potential they start earning from their shares. Angel investments can expect as high as 30% equity.

2. Venture Capital

Venture capital is similar to a broker in the share market. Capitalist offer professionally managed funds. Big companies take money from investors and invest it in start-ups. It can amount to 1-5 million rupees. The best part about venture capital investments is the expertise and monitoring that they bring along. Ordinarily, VCs invest in equity and once the business releases its IPO or is acquired, they leave. Although angel investment comes with its issues of high-interest expectations and lesser investments as compared to Venture capitalists; it is important to remember that Google, Yahoo, and even Alibaba were a result of Angel investing.

3. Crowdfunding

When a small amount of money is taken from a large group of people to start a business or venture. People invest if they believe in the idea. The money invested by each member/investor is fixed depending on the business idea, goal, plan of action, and plan of making a profit. This option is great as it helps in getting funds at the initial stage itself.

4. Self-funding / Bootstrapping

When it is hard to convince others to invest in the plan and vision, the entrepreneur can go with self-funding and enjoy freedom. Further, it helps in building the confidence of the investors to invest in the future. However, not everyone can fund a large amount individually, thus it is possible only for small amounts.

Two Points That an Investor Should Know While Investing in Start-Ups

1. Analyze The Risk

There is a considerable risk involved in starting a new business; many times, a start-up fails and leaves the investor with nothing. On average, one out of 10 start-up companies has become a success. Thus, one should try to invest in start-ups, which ensure that if the company is unsuccessful in making a profit, it will return the investors’ money and invest only after gathering thorough information regarding the start-up – the products it is dealing in, present demand of the product, future demand of the product, competitors of the start-up, etc.

2. The Amount You Want To Invest

In India, there are many domestic rupee-denominated funds. They cost around 2% in fees and 20% of the profit. Still, the asset class is not for individual investors to experiment with, and professionals are paid to work on behalf of such individuals.

If a person wants to invest a small capital- in thousands or lakhs, it is preferred that he finds an entrepreneur he knows or near him and have a direct transaction.

But if the amount to be invested in large, say a crore or more, then it is preferred that the investor joins an “angel network”. Every city has several angel networks. There is usually a token membership fee for angel networks. Angel network provides an opportunity to come in contact with various ideas and entrepreneurs who want funds for their start-up. One can invest Rs. 20 lakhs to Rs. 1 crore at a time. Along with the investment amount, one has to pay transaction expenses per investment, including a legal fee, diligence cost, etc.

Investment is required to take the best advantage of the existing and upcoming market opportunities.

References:

https://cleartax.in/s/startup-funding-options-india/

What do you think?

Written by Sharon Raju

Sharon Raju is a law student pursuing BA LLB from Rayat Bahra University, Mohali, Punjab. She is born and brought up in Chandigarh, Punjab. She is a detail-oriented college student with a keen interest in research and writing. She has worked and trained in prominent organizations. She deeply believes that the best way to evolve your mind is by reading.

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