Early-stage investment are when people or companies provide start-up businesses funding for their projects, typically when these projects are just beginning and are still in the market research or development stages.
A snapshot of different equity funding stages of a company:
Traditionally, an early-stage investment is reserved for venture capitalists and large institutions as it requires a lot of in depth analysis on the company, industry and the entrepreneur. Also during this stage most of the companies would have little to no revenues hence these large investors have to generate forecast models on the potential growth of the company and the industry as a whole.
India’s startup ecosystem has notched up record investment of nearly $ 36 billion (INR 2.7 lakh crore) in privately held companies in 2021, which had increased three folds from $ 11 billion (INR 82,000 crore) in 2020
The volume of seed-stage deals dominated with nearly 396 deals aggregating to $705.86 (INR 5,300 crore) million while about 166 investments at series A amounted to about $1.67 billion (INR 12,500 crore), data until December 20
Private venture capital investments in India- 2021
Private equity-VC funds invested $63 billion (INR 4.7 lakh crore) in Indian companies in 2021. This represents a 57 per cent growth over the $39.9 billion (INR 3 lakh crore) invested in the previous year.
E-Commerce was the favourite sector among investors in 2021, attracting $10.3 billion (INR 77,000 crore), followed by fintech which attracted $7.7 billion (INR 57,000 crore).
Sequoia Capital India was the most active investor in 2021, crossing a century in terms of bets (105 transactions across 91 companies), followed by global investor Tiger Global (which was part of one out of every three $100M+ deals during the year) with 60 investments (across 47 companies)
Massive returns by Indian startups
Indian startups have generated massive wealth for early investors. Let’s look at how few of these companies have generated extraordinary returns for its investors:
Zomato: Assuming an angel investor invested 10 lakh rupees for a 0.2% stake in Zomato during the first round of equity funding back in 2010. On 23 July, 2021 right after the share got listed in the stock market, his investment would have been worth over 180Cr.
Zepto: Quick grocery delivery app Zepto — founded by two 19 year old Stanford dropouts currently valued at $570 million.
Points to consider while investing early into a company
1.High potential return on investment
Investing in a start-up from its budding stage will be more beneficial to the investor as it will yield more profit and share stakes in the start-up unlike if invested late. Investing in a start-up has its risk but if the start-up succeeds it will yield more returns than the initial capital provided.
2. High-Risk High Return
As start-ups are just companies at an early stage of growth there could be chances that the company that you invested in may either fail or grow and become a great establishment. Investing in start-ups after having a background check on their start-up fundings will not only result in profit but also reduce one’s risk.
3. Diversifying Opportunities
There are various start-ups in different fields and markets which give the investors the opportunity to vary their range of investments. The large-scale market shifts are less likely to affect the start-ups which serves as a good diversifying strategy to minimize risk across your investments.
As an investor you should realize that the start-ups are dependent on your investment, your single investment helps them to reach a step further in the market. The start-up will bloom efficiently if the entrepreneur and the investor have a healthy and participative relationship to bloom the start-up.
By 2025, India is expected to generate more than 150 unicorns which is more than more than double the current number of unicorns in the country.
Investing in start-ups not only gives you profits but also helps to promote and create new opportunities for others and helps you contribute to aspiring innovations.
How can retail invest in pre-IPO shares
Pre-IPO investing is defined as the process of buying the shares of a private or a public company before it goes public through an Initial Public Offer. Even before they go public, companies require huge amounts of funds to expand and create a customer base. If an investor invests in this funding, it is known as pre-IPO investing.
1.Direct buying of pre-IPO company shares thru off-market transactions
Multiple startups offer platforms for retail investors to buy and sell privately held company shares. These are the best method for retail investors to invest into pre-IPO companies to potentially multiply their wealth in the long term.
You can check out us out Investopia. We have created a new marketplace that aims to democratize retail participation in early-stage pre-IPO equity investment opportunities.
2.Investing into a VC fund
Venture capitalists raise money from various funds to invest into startups. Although these funds are limited to institutions, pension houses and HNI’s; this is another common method to be an early investor in budding companies.