90% of startups fail.

A bit odd for a piece titled Startup Investing 101? We like to provide disclaimers loud and clear rather than reserving a footnote for compliance purposes. It is also to set the tone for the rest of the piece: investing in startups comes with the risk of losing your entire investment.

But having been operators for a good part of our lives, we at Infinyte Club understand that despite the tall risks that come with startup investments, the potential for returns that can set one up for life very much exists.

Life changing or not, this asset class with outsized, life-changing returns has largely been inaccessible to the very people who get into the trenches alongside founders to create gravity defying companies. Until very recently when things started to change for the better.

So, we have created this guide to help you understand and unlock access to an asset class that was traditionally reserved only for those with millions and billions of dollars.

What is startup investing?

In simple terms: you put your money into a startup in exchange for equity. Unlike publicly-listed companies, this equity remains illiquid and devoid of any returns until much later into the lifespan of the startup.

Also unlike public companies where shares trade on an exchange, access to private equity tends to be a lot more exclusive. Many of these startups are often very early in their journey, so much so that a definitive path to profitability or even a steady source of revenue is a distant thought.

If it is so exclusive, how does one get access?

There is no one-size-fits-all approach to this and many investors choose to go with multiple ways of being invested in startups.

Angel Investing

If you are already a part of the startup ecosystem, chances are, there are people in your network who are angel investors or are at least privy to the early rounds that new startups raise.

To get started, put it out there online and in those circles that you are open to angel investing in an individual capacity.

One other way of getting access to angel investing is looking for online platforms that now act as an intermediary between investors and startups, but this typically involves paying a fee for the facilitation as well as a potential share of the returns.

Venture Capital & Online Syndicates

Venture capital firms are typically those that raise funds to the tune of hundreds of millions of dollars over specific periods of time to invest in different kinds of startups. In case of online syndicates, every single investment is made via a special purpose vehicle (SPV).

VC firms have two sets of people: limited partners (LPs) and general partners (GPs) where the former are the investors and the latter the decision makers when it comes to investments.

A syndicate has a lead, and investors/backers who can choose the deals that they would like to put their money into.

In any case, however, regulatory rules require one to be an Eligible Angel Investor to be dealing in private securities.

Who is an “Eligible Angel Investor” and how do I become one?

According to Securities and Exchange Board of India (SEBI) regulations, for an individual investor, one needs to have net tangible assets of at least INR 2 crore excluding the value of his/her principal residence and who:

• has early stage investment experience, or
• has experience as a serial entrepreneur, or
• is a senior management professional with at least 10 years of experience

Should you invest in startups?

That is the question, isn’t it? Considering the high risk, high reward theory, a few things must be checked off before one can think of moving forward (or not):

Risk Tolerance

This one is obvious considering the enormous amount of risk involved.

The kind of investor you are is what’s most important when it comes to startup investing. If you are someone who likes to play safe where at least some part of your investment comes through, this asset class is definitely not the right fit for you.

Never allocate more money to this asset which you can't afford to lose.

Area(s) of Expertise

We are all for portfolio diversification - which becomes all the more important considering the success ratio - but diving headlong into something you don’t understand at all with your hard earned money is definitely not recommended.

This is especially true if you are an individual investor because unlike VCs, you don’t have a team of experts making the call.

Choose startups where you have a clear understanding of the business and the broader space. By doing so, you are not only setting yourself up for a better chance at success but also bringing value to the cap table with your expertise and access to relevant connections.

Parting with Liquidity

Once again, if you are looking at receiving returns or access to your invested money in the short term, look elsewhere.

On average, it takes 7-10 years for investors to make any money from a startup and unless you have that financial cushion, it’s best to avoid exploring. Secondary transactions - where new investors buy equity from founders, employees or an existing investor - are sometimes an option but even these happen after the startup has grown to be of a considerable size.

What is the ideal approach?

Honestly? There isn’t one. Startup investing is fraught with unknown variables that include considerations about the broader economy, once-in-a-lifetime scenarios like a pandemic and whether or not the founders are in it for the grind.

But there are a few things to help hedge those bets.

For one, meet the founders, understand how invested they are into the idea and how they see it going from 0 to 100. A clear vision or the lack thereof is often why many startups fail. If you don’t know them personally, use their credentials to get in touch with others who can give you a better understanding. Even if you are investing through an SPV, do your own due diligence before investing.

Second, you need to build a portfolio where the problem statements being solved are diverse. Diversification is a necessity if you want to have a fair chance at any kind of success as a startup investor, because the more you invest, the higher your chances of a potential return that wipes out the losses from the rest.

And finally, only invest in ideas that you personally believe in. Running behind the latest fad without believing that it will succeed is very likely going to leave you with a smaller appetite.