Startup as a growing Investment Asset Class

Before starting my investment journey, I was the founding member of a research startup where we monitored and analyzed the evolving venture capital and private equity landscape. I was super fortunate to work alongside incredibly good people who were forward-thinking, collaborative and were equally obsessed with the state and future of VC/PE. In 2016, following the acquisition of the startup, I began to delve into the world of angel investing. Having gone from a role of researching the investment ecosystem to now investing directly as a seed investor, a key trend I saw was the emergence of Startup as an asset class.

India has accelerated in the last decade, more so in the last two years, becoming a digitally transformed country. This year alone, Indian startups raised more than $24 billion, spread over 1,000+ deals, with 34 startups entering the coveted unicorn club. Financial technologies, Healthcare, Software as a service (SaaS) and many other sectors are now paving the way by providing innovative solutions with practical utility and building products for a large market – domestic and global. 

The startup ecosystem has witnessed significant growth trajectory on the back of technology adoption but where does that leave investors – aspiring angels and traditional UHNIs? Just like any other asset class, investors evaluate startups by looking at team, market opportunity and timing of the product/solution. Motivation and drivers are many which include interest in sector, business models, consumer trends and technology but more importantly the financial upside one can achieve.

Pandemic has created huge tailwinds and investor engagement has increased to 5X in 2021 for startups. We are witnessing the rise of individual investors (retail investors) and low entry barriers for them to invest in this asset class through seed funds. With zero membership charges and no transaction fee for investing, many HNIs and professionals on an average have been making 3x to 5x returns (in some cases more) on their startup investments within a three-year timeframe. This has translated into higher returns compared to other asset classes. But how does one go about investing in startups? The ability of experienced lead investors who have been operators to identify and invest early in startups is critical. Providing opportunity to UHNIs, HNIs and working professionals to do follow-on investments in portfolio companies and thus providing access to top-tier deal flow is key here. 

iSAFE Notes or ‘India Simple Agreement for Future Equity’, is an investment instrument which allows investors to make a cash investment in return for a convertible instrument. iSAFE Notes have become a popular mechanism for angels to invest into startups.The compulsorily convertible preference shares (CCPS) can be translated into equity when the startup they back, go on to raise further capital. The documentation is 1:1 between the investor and the founder, and it helps startups close the funding round in 24-48 hours instead of waiting for 8-12 weeks to get money in the bank. 

Picking winners and building a winning portfolio should be the motto for active and aspiring investors. As we move into 2022. Startups are becoming the most favorable option purely based on the ROI. Deal timelines vary widely, but a good investment gets capital quickly. So the ability to invest early into a growth company with a potential 5x return in 3 years or a potential unicorn is a huge motivator. The ability to invest as low as USD 3-5k without any fees, membership or transactional costs is encouraging many investors to come forward. With lead investors having operator experience helping founders, India will see a surge in angel investors looking to apportion a 25% to 30% of their annual investments into startups.

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