Early-stage Investing as an Asset Class: Here’s what you need to know

June 22, 2021 12:05 PM

While early-stage investing hasn’t reached its full potential yet, it has gained immense traction in recent years. Early-stage investing goes above and beyond just reaping profits.

fundsNFO's generally span over 15 days, while Navi Nifty 50 Index Fund NFO hit the Rs 100 crore mark in just 10 days. (Representational image)

Investing in start-ups has long been considered a high-risk venture. After all, it is often pointed out that early-stage businesses don’t come with a steady revenue stream or an established customer base, and their product offerings are still evolving. However, this ideology has undergone a massive shift thanks to Venture Capitalists, Angel Investors, and Angel Networks that have consistently invested in early-stage ventures. These players have built early-stage investing as an asset class and a fast-growing one at that.

While early-stage investing hasn’t reached its full potential yet, it has gained immense traction in recent years. Early-stage investing goes above and beyond just reaping profits. As an investor, one tends to look not just for wealth generation but also a healthy mix of growth and value in the venture. Diversification must be the go-to strategy to not only minimize the risk that is associated with investing but also to build a robust portfolio. Early-stage investing helps investors do just that and approaching it as an asset class, paves the way for a stronger and more resilient startup ecosystem. To gain a better understanding, let’s delve deeper.

Building the early-stage investing asset class

Early-stage investing as an asset class requires a structured portfolio approach. Think of early-stage investing as any other asset class to invest in since start-ups possess similar characteristics as any other business and are subject to the same laws and processes. However, it is important to note that when foraying into early-stage venture investing, outlining objectives such as capital appreciation, maximizing returns etc. cannot be overlooked, as they can result in unwanted complications and lack of clarity in the future.

Investors and Angel Networks also need to plan across multiple asset classes’ basis time horizon, risks involved, market status, performance and the expected returns. Effective diversification across debt, equity and fixed income by adopting a tactical approach and effective management is necessary. Spreading investments wide and diversifying is key. Ultimately in the long run, building early-stage investing as an asset class will act as a catalyst to creating an Aatmanirbhar Bharat while facilitating ease of doing business.

Role in shaping the start-up and investor ecosystem

Although early-stage investing is high-risk, it is also a high-reward asset class. The risk to reward ratio is more or less proportional and it comes with a 4-5% allocation and up to 27-30% returns if investments are done strategically and methodically. Besides, early-stage investing also allows focus on either a particular sector or one can choose to remain sector agnostic. Now, let’s look at how it will shape the start-up and investor ecosystem of the country.

India is currently the third-largest startup ecosystem in the world and is home to 21 unicorns. It is also projected that by 2022, the country will have as many as 50 start-ups joining the unicorn club. Given these impressive figures, it’s evident that building early-stage investing as an asset class will further fortify India’s startup ecosystem. Furthermore, it will also be a part of the development boom and India’s growth story while laying the foundation for the country to achieve its vision of creating a USD 5 trillion economy.

Conclusion

More often than not, many investors tend to bear the idea of the start-up achieving unicorn status while making the investment. It is time to break free and pivot from this approach of chasing unicorns. Allowing a time frame of 3-5 years and remaining resilient is vital to enabling the growth of this asset class. Some Angel Networks display evidence of the immense value that this asset class brings to the table through their IRR (Internal Rate of Return) but this can be achieved only by remaining consistent and following a systematic and meticulous approach.

by, Nandini Mansinghka, Co-Founder and CEO – Mumbai Angels Network

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