Startup investing – Is it a fad or an asset class?

view original post

Every week we find more Unicorns than movie releases which raise a question; is it a fad or actually asset class.

Well, a startup is nothing but a big business idea that starts small but grows much faster with a variety of catalysts like technology, investor funding, solid promoter etc. One needs to understand risks before one starts to invest in this asset class. Some of the key risks one must evaluate before investing are:

  • These are very illiquid in nature, a next round happening doesn’t mean that investors can exit at that valuation.
  • These are ideas so one needs to do a lot of due diligence before committing investment.
  • The model of most startups is to disrupt the market, so it has a possibility of a shut down in case the idea doesn’t click.
  • Promoters can overestimate the market size or may not be able to execute a plan as expected.

Now the question remains how do we manage these risks?
Well, some of the things that can help you manage the risk but don’t forget, the very nature of these investments is binary in nature. Some of the ideas that an investor can use to reduce the risk are:

  • Take a portfolio approach, don’t commit a huge chunk to one startup.
  • Spread your investments over 3-4 years of time frame, this will capture a lot of newer business models over a period.
  • Use an angel network to invest as a lot of due diligence, legal and valuation validation is taken care of.
  • Evaluate a lot of deals before signing the dotted line.
  • Don’t get carried away by a recent Unicorn in any specific space, every company is different.

Well, the list of dos and don’ts will keep growing with experience.

I personally have been more comfortable investing in a good idea backed by great promoters rather than a great idea with an average promoter. I also prefer companies with co-founders rather than solo founders. Also, follow diversification in your portfolio in case you are starting your journey of startup investing. Follow an asset allocation model while investing in any asset class.

As they say, “An investor without an investment objective is like a traveller without a destination.”

So get your objectives defined, assess risks and start investing in startups.

Views are personal: The author is Paresh Kariya, Director, Sapient Wealth

Disclaimer: The views expressed are of the author and are personal. TAML may or may not subscribe to the same. The views expressed in this article / video are in no way trying to predict the markets or to time them. The views expressed are for information purpose only and do not construe to be any investment, legal or taxation advice. Any action taken by you on the basis of the information contained herein is your responsibility alone and Tata Asset Management will not be liable in any manner for the consequences of such action taken by you.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.