Investing in Startups – An emerging avenue for HNI investors

Just about more than a decade back the startup culture in India was gaining pace. Cut to 2023 and India is now among the top 3 countries in the startup ecosystem with over 99,000 startups in the country by May 2023. This has also complemented an increase in the number of HNIs in India who in turn invest in startups enabling a good flow of funds between the two. But why do HNIs prefer investing in startups and what are the pros and cons of the same? Learn all about why investing in startups is an emerging investment option for HNIs and the risks they need to watch out for in this blog. 

Read More: What is seed money in business?

What is HNI in start-up

The term HNI refers to the High Networth Individuals. While there is no specific threshold that universally qualifies someone as an HNI, in India, a person is classified as HNI if their net worth is Rs.50 lakh or more. HNIs often invest in various financial instruments such as stocks, real estate, businesses, and other investments. They may also have access to a wide range of financial services and investment opportunities, including private banking, wealth management, and personalized investment strategies. HNIs are important clients for financial institutions and investment firms due to their ability to make substantial investments and contribute significantly to their profits.

Why do HNI investors invest in startups?

Investing in startups is one of the many attractive investment options for HNIs. With the growing startup ecosystem in the country coupled with the government measures and initiatives taken to support them, investment in startups has been attracting more and more HNIs over the years. The key factors that make investment in startups a good option for HNIs are discussed below.

Diversification

Diversifying one’s investment portfolio is a fundamental strategy for managing risk. Start-up investments can provide an opportunity to diversify away from traditional assets like stocks and real estate. Since start-ups operate in various industries, investing in a range of start-ups can reduce the impact of poor performance in any single investment, enhancing the overall stability of the portfolio. India’s start-up ecosystem is thriving, with numerous opportunities across various sectors. Additionally, globalization has made it easier to invest in start-ups around the world. HNIs can, therefore, tap into local and global start-up scenes, diversifying your investments and potentially benefiting from different economic cycles and market trends.

High Returns on Investment (ROI)

Start-ups often have the potential to achieve rapid growth and innovation, which can lead to substantial returns on investment. Early-stage investments in successful start-ups can yield significant profits, as the valuation of a company may increase dramatically as it grows and gains market traction. While the risk is higher compared to more established companies, the potential reward can be equally impressive.

Early Access to Promising Ventures

HNIs often have access to early-stage investment opportunities that are not available to the general public. This early access can provide a competitive advantage, as HNIs can invest in start-ups with high growth potential before they become well-known and attract larger investments, potentially resulting in better terms and valuations.

Flexibility and adaptability

Start-up investments can be tailored to your financial capacity. While traditional investments may require larger sums, start-ups often allow for smaller initial investments. This flexibility can be beneficial, especially for HNIs who want to allocate a portion of their portfolio to high-risk, high-reward opportunities.

Involvement in Innovation

Investing in start-ups allows HNIs to be part of innovative ideas and technologies that have the potential to reshape industries. Contributing to the growth of these innovative companies can be intellectually stimulating and satisfying. Additionally, being associated with successful start-ups can enhance an individual’s reputation and network within the business and technology communities.

Active Involvement

Some HNIs prefer to be actively involved in the start-ups they invest in, offering not only capital but also mentorship, industry expertise, and connections. This level of involvement can not only increase the chance of the start-up’s success but also provide the investor with a sense of satisfaction and impact.

Tax Benefits and Incentives

The government has introduced various tax benefits and incentives to encourage investments in start-ups. These incentives may include exemptions from capital gains tax, which can significantly enhance the overall return on investment. Being aware of and leveraging these tax benefits can be advantageous for HNIs looking to maximize their investment gains.

Risks of investing in startups for HNIs

We have discussed above how startups present an excellent investment opportunity for HNIs. However, one should not ignore the risks that are associated with them. These risks could be. 

• Start-ups have a higher likelihood of failure compared to established businesses, increasing the risk of losing your entire investment. Start-up success hinges on skilled leadership. Inexperienced management or team deficiencies can hinder growth and contribute to failure.
• Start-up investments are often illiquid, making it challenging to sell shares or exit investments quickly.
• Start-ups may lack comprehensive financial history, making it difficult to assess their potential accurately. This uncertainty affects informed decision-making.
• Valuing start-ups is complex due to limited revenue history. Valuations are often based on speculative assumptions about future growth, leading to uncertain investment value. This can significantly deter HNIs from investing in startups or lose their capital too.
• Start-up investments often require a longer time horizon for returns. Patience is crucial as start-ups take time to mature and provide meaningful gains
• Heavy investment in a few start-ups can lead to concentration risk and failure of a significant investment can impact the overall financial situation.

Conclusion

The startup ecosystem in India is thriving with multiple national and international investors seeking to have a slice of the India Success Story. As of May 2023, there are approximately 16.5 lakh HNIs in the country and a significant flow of their funds in the startup industry is crucial for its success and taking it to new heights. While startups can offer great growth potential, it can be risky, therefore a balanced approach is the best way to go about it.

Also read..

• How to apply for IPO in the HNI category?
• Investment Options for HNIs
• What is Angel Tax – A Guide to Angel Tax
• Popular wealth management options available for the HNIs in 2023