How Can Retail Investors Invest In Start-ups?
Currently, there are a ton of start-ups that are democratising and making things easy for retail investors to invest directly in unlisted companies.
In this article, we will develop a holistic understanding around:
a) Should retail investors invest in start-ups?
b) What are the key things one should keep in mind while doing so?
First, let us understand the pros and cons of investing in unlisted companies.
These are companies which have not yet been listed on NSE or BSE (as opposed to companies like HUL and ITC), but you see great potential in them.
Let us first look at the negatives.
1. Loss of capital
Start-up investing is risky.
To give you perspective, venture capitalists and angel investors invest in 100 companies, and probably only 5 succeed.
But those 5 companies give so much return, that it offsets the loss by the other 95 companies.
You, as a retail investor, might only invest in 1 or 2 start-ups, hence you need to be extremely picky.
This definitely is a risky game and there can be a complete loss of capital as well.
2. Liquidation risk
If you invest Rs. 5000 in a start-up, liquidation can become a major problem.
This means that you put in your money, but you are unable to sell off your stocks that you’ve purchased in the company.
This is because there is no free market per se where you can sell your stocks in these unlisted companies.
The liquidity, in terms of passing on your stocks to someone else is not that easy.
3. Dividend risk
When you invest in private companies, they might or might not give you dividends. So, your money might get stuck for a very long period of time.
4. Performance assessment risk
If you put your money into listed companies like HUL or Tata Motors, they come out with a lot of commentary.
The news and media cover a lot of relevant information on which you can act.
For example, if you realise that the growth of a certain company is not that great, you can sell off your stocks in these listed companies.
With unlisted companies, it is not that easy to get access to quality information. Hence, the transparency is not that high.
After reading these 4 points you must have convinced yourself that there is no point investing in these unlisted companies, but we are yet to look at the pros.
1. Asymmetric risk
If you invest Rs. 5000 in a start-up, it might go to 100x in a very short span of time.
These kinds of returns are possible only in cryptos and start-ups. You take a huge risk but there is potential to make very high returns as well.
If you’re looking to put a little bit of money into these asymmetric types of instruments, then start-up investing might make a lot of sense for you.
2. You get a slightly more level playing field
Before PayTM’s stock got listed, private investors had a lot of useful information.
After the stock got listed on the exchanges, these early investors took an exit. This is one of the reasons why the PayTM stock has fallen so much.
This type of scenario usually does not play out in the early start-up game, because everyone is investing at that stage and the investors usually get the best exit when the company IPOs.
Investors enter at the seed round. Then there is Series A, Series B, Series C. The valuation of the company keeps going up with these rounds.
Majority of these investors exit or make the most money when the company IPOs.
If you as a retail investor get an opportunity to invest in a pre-IPO stage company, then there is a more level playing field there.
3. Sunrise sector
This is the biggest pro in terms of start-up investing.
Start-ups are bringing in a massive cultural shift.
There are TV shows around start-ups.
Governments are supporting start-ups.
People are learning more about entrepreneurship.
A lot of cash is flowing into the start-up sector.
Therefore, if you invest in something where the growth potential is clearly visible, the potential returns can also be manifold.
Now, what are the key points you should consider before investing in a start-up?
1. Is it an industry which interests you?
If you don’t know anything about fin-tech or ed-tech, don’t go and start analysing those ideas. You will miss a lot of critical details.
For example, if you are working in IT and you understand software-development, and you identify an investment opportunity in that space, it might be sensible for you to invest in that idea.
This is because you understand that industry well.
Don’t get excited by the idea itself. If you don’t have knowledge of that specific industry, don’t invest in the idea.
2. You need to understand clearly how the company is going to make money
If the idea is not clear to you, please don’t invest in such start-ups.
3. What are the founders of the start-up like?
Do they have prior experience of working with start-ups?
Do they have the experience of raising funds?
Have they worked with good companies?
Do they have a strong network?
Knowing this gives you a positive orientation to investing in those types of start-ups.
You are not essentially betting on the idea, you’re betting on the founder and their network.
4. What is the winning USP of this start-up?
Do you understand the idea? Do you understand the business model of the start-up?
Do you think the start-up will survive?
Is the founder and the founding team good?
Now, how can retail investors invest in start-ups?
Of course, you can’t put 1 Cr, 2 Cr or 10 Cr rupees.
There are multiple platforms you can use. One such platform is Tyke. (Not a sponsor :D)
It allows investors to directly invest in start-ups they find interesting. You can start with as low as Rs. 5000.
You can scout through the companies listed on their platform, analyse their pitch decks and make informed decisions.
Here are a few steps on how you can analyse the pitch deck of a company on Tyke:
1. Read about the problem they are trying to solve. Does it make sense to you?
2. What is the solution that they are proposing?
3. Don’t read much about the market or traction. They’ll probably state that they plan to capture 1% of 1 crore people and have 1 L paying customers. This usually does not happen. This is where your industry understanding comes into picture.
If you’ve worked in a certain space, you’d intuitively know what the market is like.
4. Check their business model to understand how the company plans to make money.
5. Check out the founder and the founding team on LinkedIn.
Hence, do your due diligence and then make a decision. 
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