15 rules for investing in a startup in India.

invest in startups

The startups in India have changed owing to a rise in angels, VC funds, incubators, accelerators, and government programs like Digital India, Startup India, and Smart Cities, which will promote startup and investment activity across cities’ new industries. The surge to invest in startups and unicorns is attributable to rising consumer spending power, mobile internet usage, access to new markets, social media use, technical improvements, and favorable customer demographics.

Every company has expenses that they must pay. Capital is the firm’s most crucial development need. Without adequate money, the business might fail. To solve this challenge and reduce risk, businesses typically seek outside funding. A startup is a corporation formed by a person or group with similar ambitions. A company may raise money in several ways.

15 rules for investing in startups in India

Entrepreneurs must be patient and prepared to do the work required for a successful fundraising round. If you are looking for how to raise funds for a startup business in India and want the below 15 rules, you should follow them.

The following stages comprise the fundraising procedure:

1. Invest in a startup that you are familiar with:

Before you put your money into a startup, be sure you’ve done your homework and understand the product or service that the firm is providing. You don’t want to be kept in the dark about your investments, so make sure you know the industry before investing.

2. Examine the company’s financial statements:

It may sound simple, but it is critical to analyze a startup’s financials before investing. Ensure you understand the company’s burn rate (how rapidly money is spent) and current runway (how long they have before running out of money). You should also look at their financial predictions to evaluate whether the firm is on pace to fulfill its objectives.

3. Recognize the company’s valuation:

In a startup, you buy a share. Before investing, understand the company’s value (how much it is worth). It can help you determine how much of the company you invest in and whether the organization is overvalued or undervalued.

A term sheet is a “non-binding” collection of offers made by a venture capital firm. A venture capital term sheet in India includes valuation, investment structure, management structure, and share capital adjustments. It specifies investor-startup contact points. 

(i) Assessment

A startup valuation is the company’s fundamental value as determined by a professional valuer. Investors choose the appropriate technique depending on the startup’s investment stage and market maturity. The Cost of Duplicate Strategy, Market Multiple Approaches, Discounted Cash Flow (DCF) Analysis, and Valuation-by-Stage approach are all methodologies for evaluating a company.

(ii) Financial Structure

It defines how venture money is invested in a firm via stock, debt, or a mix of the two.

(iii) Organizational Structure

The term sheet is the business’s management structure and comprises a list of directors and mandated appointment and removal processes.

(iv) Share capital changes

Every startup investor has an investment schedule and, as a result, seeks flexibility while exploring exit opportunities via succeeding rounds of financing. The term sheet outlines the stakeholders’ rights and duties if the company’s share capital changes.

4. Evaluating Investment Readiness

While determining the need for money is critical, it is also crucial to determine if the firm is ready to seek cash. Investors will take the entrepreneur seriously if the revenue predictions and returns persuade them. 

Investors often seek the following characteristics in startups:

  • Revenue growth and market position
  • Positive return on investment
  • Profitability and time to break even
  • Startup uniqueness and competitive advantage
  • The vision and intentions of the entrepreneurs
  • A team that is dependable, dedicated, and skilled

5. Evaluating the Need for Funding:

The company must determine why finance is necessary and the appropriate quantity. The firm should develop a milestone-based plan with defined timetables for what it hopes to accomplish in the next 2, 4, and 10 years. A financial forecast is a meticulously crafted estimate of a company’s growth over a specific period that considers predicted sales data and market and economic variables. Production, prototype development, research, manufacturing, and other costs should be carefully planned. 

6. Consider the company’s stage:

Pre-seed, seed, and Series A are the three phases of a startup. Each stage has various risks and benefits. Therefore, you should assess the company’s development before investing. Pre-seed and seed-stage enterprises are riskier investments, but the potential benefits are more significant. Companies at the Series A stage are less challenging but have lesser potential returns.

7. Establish a clear departure strategy:

Before investing, think about your exit plan so that you can preserve your investment. You should have a strong exit plan before investing in a business. This includes deciding when and how you will sell your company’s stock.

8. Spread out your investments:

Diversifying your assets ensures you are not placing all your eggs in one basket. It entails investing in various businesses, sectors, and stages. By diversifying your investment portfolio

9. Consider the startup’s location:

When making your investment, you should evaluate the startup’s location. Although startups are often situated in Silicon Valley, this does not imply that all startups are based there. Startups in various places may have different risks and benefits. Therefore, you should examine the startup’s area before investing.

10. Pitch deck preparation:

The pitch deck is a complete company presentation covering all crucial details. It all comes down to telling a solid tale when creating an investment proposal. The entrepreneur’s presentation should not be a succession of separate slides but flow like a tale connecting all of the pieces. At this point, the review committee and investors want to know whether the idea solves a genuine opportunity, if the company has a good case if the team is dependable, enthusiastic, and talented, and how much traction the group has gained so far. 

11. Investor Profiling:

Every venture capital firm has an Investment Thesis, a strategy the venture capital fund follows. The Investment Thesis acknowledges the stage, region, emphasis of investments, and firm’s distinctiveness. It is critical to investigate Investment Thesis and their previous market investments and engage with entrepreneurs who have successfully obtained equity capital to target a suitable set of investors. 

12. Due Diligence by Prospective Investors:

In concluding any equity purchase, angel networks and venture capitalists perform thorough due diligence on the business. They examine the startup’s previous financial mistakes and the team’s qualifications and experience. The financing will be executed on mutually acceptable conditions if the due diligence is successful, ensuring that the startup’s statements about growth and market figures are accurate and identifying any problematic behaviors ahead of time.

13. Recognize the valuation:

Grasp a startup requires an understanding of its value. You’ll want to know how much the firm is worth and how much you’re paying for the shares you purchase.

14. Be prepared to lose your money:

Investments in new businesses have a significant degree of danger. Be ready to suffer complete financial ruin. It means you should not invest in new companies without being mindful of the risks involved.

15. Conducting your investigation:

When it comes to investing in startups, don’t depend on the advice of others. You should do your study and come to your conclusions.

Bottom Line

If you are a beginner, and you are looking for ways to start a startup company in India, the above guide will help you with the concept of startups in India. New enterprises or startups must not just deal with processes such as getting momentum, creativity, growth, etc. Businesses must put money collected from customers in the correct location and for the true purpose after ordering the appropriate quantity of finances. That is why entrepreneurs seek startup investment.

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