Startups have grown manifolds in India in recent years and the country has the third-largest startup ecosystem in the world. As many as 21 Indian startups entered the unicorn club last year and, naturally, more and more investors are looking to invest in startups in the hope of striking gold. Still, investing in startups is a highly risky proposition and investors need to consider various factors before putting their money in any startup, however, promising it may seem on the surface.

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“For every startup that has become a unicorn, there are hundreds and thousands of others that have failed. This is not just limited to India but is a global phenomenon. Invariably, some startups are going to fail. Investors need to be very careful, especially because of the sky-high valuations many startups are asking for. Even if the startup does well, the investors may find it difficult to get a decent return on the investment due to the high valuation,” said Sidhavelayutham, Founder and CEO of Alice Blue, a platform that offers investment services and the necessary financial education and understanding to help investors make informed decisions.

According to the ace stock expert, the target startup’s valuation should reflect in its revenue and profit. A good benchmark is to compare its valuation with companies in the same industry and to consider its growth prospects and profit potential. The size of the industry in which the startup is operating and how its competitors are faring are also good indicators of its growth potential.

“Startups that are already generating revenue and ideally a profit are a better option as the startup has already crossed the initial hurdle, and hence the risk is lower. If the startup has a unique selling point and if it can continue doing business sustainably, it has a good chance of growing,” explained Sidhavelayutham.

The other factors to evaluate are the startup’s top management, its track record, and vision, and whether they are driven enough to successfully lead the company on the right growth path.

“Any investment always comes with a certain risk. It is higher with startups and there is a greater chance of the investment failing rather than succeeding. No one can predict how a startup is going to fare a year or two or more down the line, but if an investor does the basics right, the risk is reduced and the chances of making an investment that pays off go up considerably,” added Sidhavelayutham.

First Published:Mar 2, 2023 4:51 PM IST