The Perks of Investing in a Startup in India

Investoscope

The oldest in-operation company in the world is a hot springs hotel named Nisiyama Onsen Keiunkan in Japan, which has been dated back to 705. The second oldest also comes from Japan, which is another hot springs hotel named, Hoshi Ryokan, founded in 718. This does not come as a surprise that an old country with an old economy is home to a huge number of old businesses. However, these ancient business houses have something in common with the startups in India today. Most of these companies have been initiated with the financial backing of a family member or friends, similar to the modern day startups of India.

The startups in India are currently going through a honeymoon phase with the government giving all the backing they would require in the form of the Startup India campaign that was launched on 16 January, 2016. Currently India has more than 19,000 technology-enabled startups, led by consumer internet and financial services startups. As per reports, Indian startups had successfully raised $3.5 billion in funding in the first half of 2015 and the number of active investors in India increased from 220 in 2014 to 490 in 2015.

Benefits from Stock Market

As per IPO Playbook, people could be million dollars richer just from a $10,000 investment in Amazon, Dell, Apple or Microsoft at the time when their IPOs were issued. For the few lucky ones who had invested in these companies before they went on the IPO, the sky is their limit now. So when an angel investor invested money into a startup, s/he had bought a specific percentage of the ownership of the company. This way the investor gets a certain amount of shares that represents a mutually agreed percentage of all the outstanding shares of the company. Through this, the company and the investor decide upon the valuation of the company through their sheer persistence (the higher the value of the company, the higher the value of their shares).

Benefits from Government

Coming back to India, the Startup India campaign seems very promising with initiatives such as self-certification, which would reduce the regulatory burden on startups. Other benefits include tax exemption on the profit for the initial 3 years, with no inspections. Norms for public procurement have been relaxed along with the comfort of easier patent filing (80% discount on patent application). The government has also set up a corpus fund of INR 100-billion for SEBI registered VC funds over a period of four years. Other worthy mentions include incubation and R&D centres (for converting innovative ideas into profitable business), an online portal for easy registration process and the launch of the India Aspiration Fund and Atal Innovation Mission (an entrepreneurial network to boost creativity and to honour innovation).

For the investors, they have to mind the fact that under the Startup India campaign, a company is tagged as a startup, if the company has been registered or incorporated in India for not more than five years. This company should not have an annual turnover of more than INR 250 million in any preceding financial year. This ‘startup’ should be working towards innovation, development, deployment or commercialization of new or significantly improved products, processes or services driven by technology or intellectual property that will create or add value for customers or workflow. Exclusions include those entities that have been formed by splitting up or by reconstruction of an existing business.

The Startup India Action Plan further defines a startup as those companies that are recommended by a Government approved incubator or a SEBI approved investor. Having a patent in connection with its business would act as a shot in the arm for a startup image.

Looking at the existing setup, Indian administrative infrastructure is known for lethargy. India, with a population of over a billion and with a gross national income of $1,590, stands at 155 when it comes to ease of starting a business. The Indian Government is currently working on removing all this by introducing certain levy in the entire setup and operation process. The Government is banking heavily on SMEs and through this; startups in the manufacturing sector are getting a huge boost under the Make in India campaign.

Benefits from Shrewd Mentality

Indian Businessmen are known for their shrewd attitude. It has been imbibed in them from generations. They have a knack for the right price for the right product. Now when the ball is in the investors’ court, they need to be really slick about it. Peace-loving Indians always focus on creating a win-win situation (the secret to stability). Investors can buy the shares with all the wit under their disposal, but while doing so, they need to come into a legal agreement for a certain amount of RoI in a certain time period. A novice in such circumstances would have to understand that the companies’ business plan would return them their desired number (RoI) in a reasonable time period which should comfortably fit into the exit strategy of the novice investor.

At some instances, it has been observed that a penalty clause is also inculcated into the agreement, if the investor does not achieve his/her preset milestones. Being crude and shrewd is the key, but not all the time. Investing in startups is an art with no predefined textbook and with no set formulas. It is all based on deep insight and strong guts. Today, there are many investing platforms that help a novice to learn and become proficient without going through the initial scares that usually follows in any business investment.