Equity Or Debt: Navigating The Investment Dilemma
Apart from good businesses, another important factor in investing is the potential and character of the founders and the ability to build a team, say experts
Investing is an art and not everyone is an artist. Thousands of questions erupt in mind while investing such as where to invest, what stage should be invested, and more importantly whether to invest in equity or debt. While speaking at an industry event, experts in a panel discussed all these permutations and combinations.
When it comes to investing, a key dilemma is weighing the potential returns of equity (likely 10 to 15 per cent pre-tax) against those of debt (around 8 to 10 per cent). Without clear parameters, making a decision can be a challenge.
Ratna Mehta, chief executive officer (CEO) and managing director (MD) of Fundalogical Ventures said that it depends on the timing of investment in a company. “If one has to invest in pre-seed, one has to be very sure that he/she has a portfolio of assets. Because you want to know what is coming,” she added.
She emphasised that diversifying the investment for a better return may create a balance between differently performing companies. “At the early stage, you generally have some companies that will perform okay. But you might have 2 to 5 times, 6, 7 times returns across the portfolio,” she stated.
Maneesh Shrivastava, co-founder of Alphavalue Consulting, talked about profitability in investing. A profitability, that has an impact to cover all your wealth. “If you invest in a company, whether it can bring the returns of that entire portfolio or not,” he added.
Shrivastava explained his meaning of profitability. He stated, “If I run a USD 100 million fund, which is an 820 crore fund. I have to invest 20, 30 crore in one company then I will look at that company that can return that entire 800 crore to me. That would be the probability factor.”
Notably, during the discussion, experts also caution against reckless investing strategies, warning that blindly diversifying across 200 companies without analysing their financials is a recipe for disaster. Instead, they recommend a more thoughtful approach, considering whether a company has a forward-thinking vision, the potential to disrupt its market, and the ability to create a competitive edge. This nuanced evaluation can reveal hidden opportunities and help investors make more informed decisions.
Experts emphasised the importance of barriers to entry in companies, with one expert noting, 'If a company lacks significant barriers to entry, we won't even consider investing. Those barriers are essential.'
According to industry experts, retail investors often fall prey to companies' marketing gimmicks and they warned against prioritising flashy promotions over substance. Many companies in tier 2 and 3 cities have been successful despite lacking flashy marketing, operating under the radar with strong performance. Panellists cautioned against investing in companies that rely too heavily on marketing hype, emphasising that true potential can be found in businesses with less visibility but solid fundamentals.
Apart from just looking at good businesses, there are other factors too that drive one to invest in a particular startup. And the important one is the potential and character of the founders. Mehta said, “I think if you back the right guy, whether the industry is going to its cycles, you will be able to make money, through the ups and downs.”
