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Risks involved in Start-up Investing

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Start-up Investing

India has always been a country with ideas and over past few decades its citizens have become willing to experiment and take chances. More and more of these ideas are converting into business propositions,giving rise to the number of start-ups in Indian economy.

But the questions are….

What are the risk involved in Start-ups?

High degree of risk

The probability of a start-up working out is minuscule. Reports suggest that 90% of start-ups are failure. This low probability of success constitutes to a higher degree of risk while investing in a new business. Before injecting money, an investor should assess his capacity to undertake financial risk. Whether he is a risk averse or a risk seeking? Start-up funding is not an option for risk averse investors, as in the case of failure the returns would be null, and he will end up losing all his money.

Uncertainty in the timing of returns

Start-ups have a long gestation period and the time at which it would generate returns cannot be predicted with certainty. In majority cases initial five years, a start-up is expected to run in losses and its operations are financed by investors without any expectation of earnings. This time period may vary depending upon the sector and the market. It requires patience. A risk averse person needs sure and immediate returns.

How to mitigate the risk?

The uncertainty regarding the future can never be eliminated, however an investor can systematically reduce his risk by avoiding too much of exposure. This can be done by Crowd funding and Diversification.

What is Crowd funding?

A concept that, after gaining popularity in US and UK, made its way to India a couple of years back. Crowd funding is a process of one party financing a project by requesting and receiving small contribution from many parties in exchange for a form of value to those parties. This works exactly like a mutual fund. Crowd funding is an online mean to bring together small businesses, start-ups and investors. The amount invested by each party is comparatively low hence the risk is mitigated.

One of the oldest example of crowd funding in India is the story of the Reliance Industries founder Dhirubhai Ambani. His small yet growing textile business was crowdfunded by communities across the Indian state of Gujarat. Similarly in current scenario, “I Am” film directed by Onir which been financed through contributions by more than 400 persons, approached through Wishberry,a crowd-funding portal. Crowdfunding is gradually firming up its presence and success in India.

Diversification- How?

The other way of reducing your exposure to risk is to maintain a diverse pool of companies in your portfolio. An investor can diversify on the basis of sectors, location or stages. A higher risk in one sector can be compensated by the lower risk in other sector. The idea is to spread your investment across many companies so that a success of a few projects can offset the losses incurred in others.

Indian start-up ecosystem has really taken off and the number are expected to rise from 3,100 start-ups in 2014 to a projection of more than 11,500 by 2020. It’s a revolution and it is going to change the way the markets are working today in India. Indian investors are warming up to the idea of funding start-ups and intricacies related to the risk involved.

There are methods to mitigate these risks through crowd funding and diversification but on the flip side these method reduce the amount of returns as well. Start-up investment is a long run game yielding returns to those who are willing to play till the end.

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  1. Funding a start-up business is like getting to swim into the water without knowing its depth. It can be an easy and happy experience for you and at the same time it can also be quite an unpleasant experience. To speculate the success of a start-up business is quite impossible. So only if you are in a position to cope up with financial loses that may result due to investment in a start-up business, you should opt for it.

  2. The above concept is very well mentioned in Robert Tiyosanki’s book, “Rich Dad Poor Dad”. He explains that how gains are never made in people shy away from risks. He explained his example where he invested in a start-up company ( the statistics showed the start-up success to be 10%) and could buy his Porche car. Risks are greatest but the returns are also greatest. Its a game of smart play, economical conditions, your knowledge and gut feeling and a bit of luck. So, if you have a heart of gold, you may go for start up investment and expect more gold in return

  3. Investing in startups is most suitable for those who are affluent and love to take risks. One major factor to be considered while investing in start ups is the time to expect returns. There are cases in which an investor can get returns on his investments in a short period and there are also illustrations in which an investor has to wait for more than ten years to enjoy the returns. Also, there are investors who have never got neither ROI or their principal amount.

  4. Start-ups need not only careful planning and homework but also strong back ups if a plan fails. A careful market analysis before venturing out is required. This involves risk but then to earn money risk has to be taken. A lot ways have been improvised to minimise the risk factor like the crowd- funding peer- lending,diversifying the portfolio. The main aim of any start-up is to achieve success and success comes with failure.

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