Key Considerations For Investing In Startups In India

Venture capital (VC) investments in Indian startups plunged more than 38 per cent in 2022 due to economic uncertainty and market volatility, a report from GlobalData showed in January. This has affected fundraising and investment activities across the country. 

The report added that 1,726 VC funding deals worth USD 20.9 billion were announced in 2022, compared to 1,715 deals worth USD 33.8 billion in 2021 in India. 

India has a large ecosystem of startups. In every Indian family, at least one member is involved in any startup business. If not, they will do so in future, said Ashish Agrawal, Director, Resurgent India, while speaking at the BW CFO World's Finance Leadership & Strategy Summit 2023.

At the initial stage, after investing their own money, the startup businesses seek investors' money via VC funds, angel funds and private equity funds. 

In the previous year, the country witnessed an investment worth USD 25 billion in the startup ecosystem via various VC and equity funds. India has more than 100 unicorns today; the majority of them are from Bengaluru. 

These unicorns have an overall valuation of nearly USD 27 billion, making India the third largest country in the world with these numbers of unicorns, said Agrawal. 

He further said that in the last 7-8 years, Indian startups have bagged USD 136 billion of investments. In 2021, the startups received the highest funds across sectors, and the following year, the funding went down due to a change in the mindsets of investors.

Agrawal explained that VC investors seek the commitment level of startup businesses. "There are business owners who are indulged in two-three things simultaneously, which leads to dilution of their commitment to one particular business," he added. 

Another critical factor is the robustness of business models and the large customer base. Furthermore, skilled employees play a vital role. 

Thirdly, the growth prospects of a startup firm are a significant factor. Additionally, he said that one should be aware of the industry outlook and develop changes per customer preferences and the presence of disruptive technologies. The utilisation of funds is the foremost right of an investor. The investors should know how their capital will be invested and what is the proposed burn rate in order to understand whether the fundraising plans are reasonable. Make sure that the company has enough capital to meet the next milestone. 

Lastly, equity investors usually have an investment horizon of 5-7 years and an exit plan after making a substantial profit on their investment. The few exit routes that can be followed are Initial Public Offer (IPO), Strategic Acquisition, Secondary sale and Repurchase by the promoters.

In addition to these key considerations, Agrawal highlighted that knowing the right investors for your organisation is crucial. Negotiation with investors on valuation for the business is important.