A Guide to Startup Investing 101


One can have an ordinary business idea. And it can culminate into something extraordinary. However, for that idea to be profitable, it needs the proper funding and execution. This is where venture capital, bootstrapping, or angel investing helps these startups.

Although all three of them work on similar lines, they are not the same. All three of them work on investing in startups that need funding to grow further. They all give the money, but their approach is a little different.

Angel Investing
Angel investing refers to high or ultra-high net worth individuals (HNIs or UHNIs) who invest their own money into startups or entrepreneurs in exchange for equity (percentage of the company’s share). This is usually done by successful entrepreneurs who have gone through the drill. They have a great network and can help the company in terms of growth and expansion. In India, some popular angel investors are Dr. Aniruddh Malpani, Ankur Warikoo, and Kunal Shah.

Angel investor networks also exist. These aim to diversify the funds of the angel investors through a network of like-minded and net worth individuals. However, angel investing has some cons, too – the funded amount is usually lesser than venture capital, and there may be a clash in the thought process of the founder and the angel investor.

Sometimes, a startup’s founder may bootstrap their company. This means that they fund it through their savings/salary. This is an excellent way for a founder to start their own company and not lose any equity. However, this investing method has its drawbacks. A founder does not gain any networking or growth benefits, as opposed to having backing from external investors. A famous example of a bootstrapped company in India is Zerodha.

Venture Capital
Lastly, the most popular method is the venture capital (VC) method. In this, a venture capital company works to identify industries and companies that may hit it off within the next 5-10 years. For instance, there is a rising trend in investing in edtech, fintech, and health tech. Sometimes, these companies may also approach the VC. The VC then identifies the company based on market size, founding team, and past financials, among many other factors. If the VC likes the company and its idea, it may fund it in a round – pre-seed, seed, series A, series B, series C, and so on.

Once the company becomes prominent and famous, the VC gets a substantial return on its investment. Other times, the company goes for an IPO (Initial Public Offering), and the VC receives an even greater return. They may also choose to exit after getting a good ROI. However, things in the real world are not as easy as they seem.

Usually, 90% of the startups fail and with that, so does the funded money. There is a low chance for VCs to make great money from each of their investments, primarily due to the uncertainties involved in the startup culture. However, whenever one of their startups becomes big, they recoup all the lost money on the failed startups and a great return on the particular company.

After all, it is a risky business and needs good thinking before investing. There are several other ways of investing in startups, but these three are the most popular ones.

Categories: Angel Investors

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