New Asset Class for individual and corporate investment Startups

Startups becoming unicorns or even decacorns, entrepreneurs becoming national idols, co-working spaces sprouting up around the country, and a slew of other good developments in the entrepreneurial ecosystem have all occurred recently.

Have you ever pondered who is fueling this growth or who is giving 'wings' to game-changing ideas and trailblazing entrepreneurs?

Investment in startups, often known as angel investing, is a growing possibility for retail investors who want to support and be a part of a startup's growth trajectory.

Given the nature of startups as an asset class, I strongly advise early investors to take a portfolio strategy to investing. Instead of making one or two large investments, invest in 10-15 companies to hedge your best bets.

What is an Asset Class?

An asset class is a collection of investments with comparable characteristics and that are governed by the same rules and regulations. As a result, asset classes are formed up of instruments that typically act similarly in the marketplace.

Asset classes include equities (e.g., stocks), fixed income (e.g., bonds), cash and cash equivalents, real estate, commodities, and currencies.

Between diverse asset classes, there is frequently relatively little connection, and in some circumstances a negative correlation. You can say Asset class is a tool for financial advisers to assist investors diversify their investments.

Source- ClearTax

What are the Different Types of Assets?

Investing provides returns commiserate with the risk taken. Old options are Gold, Bullion, Stocks, Real Estate. New one is investing in Startups

“What’s the use of savings? It hardly provides enough returns.”

If someone ask, why is interest rate reducing, the answer is all developed and high growth economies tend to be business friendly. In that process, cost of money i.e. interest rate at which individuals or corporates get the funds from banks, reduces to make putting business venture attractive.

If lending to businesses are low, interest on deposits are lower too. Developed countries like USA has interest rate of 1.25% on savings, UK has 0.5% and so are with the other developed nations.

Traditional avenues of investment in Gold / Silver, Forex, Real Estate, Equity, Mutual Fund, Fixed Deposit among others have diminishing ROI over the last 5 years. Here are some statistical facts

• Silver and Gold have slipped from $32 to $17 & from $1608/oz to $1270/oz respectively, over the last 5 year
• USD, EUR & GBP [against Rupees] have moved from 55, 70, 87 to 65, 72, 83, giving returns of 2.7%, 0.5%, -0.8% respectively over the last 5 years
• Sensex moved from 19427 to 31109 and Nifty from 5905 to 9605, giving returns of 10% and 10.4% of an investment on index based funds, over the past 5 years
• FD returns have changed from 8% to 6.25% and trend is reduction in interest rates further
• CAGR returns on Real Estate investments have been roughly about 8% (over last 5 years), 13.4% (over last 10 years), 10.8% (over last 15 years) and 6.2% (over last 20 years) [Source: Morgan Stanley]

Source-  by Etienne | Medium

 

Indian prices are directly proportional to prices quoted above in dollars. All the above returns are pre-taxed. Trend is not only relevant between the end node points of these last 5 years but also applicable equally during these last five years.

Investment in Real-Estate and Gold were giving positive and healthy returns when substantial investment was being funneled through black money. It is still possible but it is becoming difficult basis various government initiatives.  It may not be worth such a risk.

Alternative

If better returns are to come from business, why not invest in the business itself. If you believe start-ups have a promise in the near future, not only to solve problems in our society but also for financial returns, please read further on. Investing in the startups as angel investor, to start with, is new asset class.

India has caught on start-up culture after USA (Silicon Valley), UK, China and Israel. Investment in start-ups is being done by family and friends at ideation stage, by angel investors at seed stage and by venture capitalists at growth stages.

With high availability of quality founders, bright mind and unmatched passion, many startup founders are succeeding and generating returns of unparalleled magnitude to their investors.

With so many startups failing, is investment in startup not risky? Yes and No. Like any investment – be it equity – primary or secondary, silver, gold, real estate, etc. you are not sure any longer of positive returns. I will be surprised to see a portfolio manager committing any returns at all, if not investing in gold bonds. In that sense, Startups too are risky.

However, this risk can be reduced, just like knowledgeable people who manage your money in other asset class, The Startup Board and others, who understand due diligence process, reduce the risk, by considering level of risk consciously. It is just like in a business.

Source- Credit Suisse

Consider the benefits to individual angel investors –

• high possible returns from this new asset class,
• opportunity to mentor the invested founders and keep a watch on the risk,
• spreading your risk profile into new asset class, balancing the portfolio
• enhancing tax incentives for your portfolio,
• possible position on the board of possible next wave technology startup, to help solve problems in the society (also making money).

For big corporate, instead of setting up new R&D or investment into product development, let it be left to a startup, who can turn-around the idea into execution much quickly and inexpensively.

Services companies, who know little on product development and management, can better partner and take the offering to market together, to their customer or startup selling it to others, thereby getting better traction with low operating expenses. A hands away approach immune the corporate brand, in case product does not succeed.

Both corporate and startup can avail tax incentives that exists. It also rejigs the innovation landscape of the organization, from an external catalyst doing innovative thinking, product development, roll-out, all of which organizations take longer in refreshing themselves. Startup company, with such close watch, may be good inorganic investment opportunity too for the corporate.

How to invest

If you have sensed benefits already, there are multiple ways to go on to identify the startup and invest. You can do it yourself, take help from those working in the eco-system and know startups and market trends better, or approach through chamber of commerce.

Key parameters needed to look in the startups (in that order) are:

• value system of the founders
• their educational and experiential background
• potential of the sector in which venture is operating in
• business model of the startup and
• scalability of the business, model or sector.

Once these basic things are in place, it is all business acumen of the investor or advisor.

Happy investing.

Ashish Jain

Writer mentors entrepreneurs