Love or hate it. Shark Tank India has created a fresh wave of interest in startups and entrepreneurship among people in India.
And many people want to become a shark (investors) themselves. They are now finding ways to invest in Indian startups. Many startups are allowing retail investors to invest in them.
But should you invest in startups? Is it going to make wealth for you? Or is it just another gamble to satisfy your FOMO? Let’s find out.
Estimated read time: 3 minutes and 16 seconds
Buckle up, here we go!
Let’s say you saw a brilliant business pitch on Shark Tank and are impressed with the founders. Your favourite shark invested in the startup.
Now, you wish to invest in the startup and be part of the startup success story. You want to earn 20x returns on your investment like your shark.
But you noticed everyone is raising money in lakhs. If you have that kind of money lying around, you can become an angel investor and invest in the startup.
But you don’t have that kind of money. And you are feeling FOMO. At this moment, you come across platforms like Tyke, Sateeq, Infubiz, etc.
These platforms help you invest in startups for as low as ₹5k. Are you wondering how’s that possible?
It is possible through crowdfunding.
Crowdfunding is a way of raising money for a project or an idea by getting small contributions from many people, typically online. It’s a way for people to support something they believe in, like a new product, by contributing financially.
Platforms like Tyke help startups to raise funds from many small investors. This paved the way for fans or enthusiasts like us to invest in startups and wish to earn higher returns.
But there is a difference between the Shark (Angel investor) and us investing in the startup.
To keep the crowdfund investing process simple, these platforms came up with a new investment instrument called Community Subscription Offer Plans (CSOP)
What is CSOP?
A CSOP is a contractual agreement executed between a subscriber and the founder. The agreement entitles the subscriber to community benefits and a grant of Stock Appreciation Rights (SAR) in exchange for a subscription to the startup’s CSOP campaign.
This is the exact definition provided by Tyke. You can check out their explainer video here.
In simple terms, if you invest through CSOP, you will be a subscriber to the startup. You won’t receive any equity (ownership) or any rights.
But through SAR, you will receive price appreciation gains similar to equity shares. And if the startup wants, it can share exclusive discounts or membership with you.
If you are a serious investor, you know to avoid this instrument. As The Ken says, “CSOPs are actually innovative non-equity instruments with an underlying speculatory bet on the company’s future valuation. Under securities laws, these contracts resemble derivative products, which are prohibited unless traded on a recognised stock exchange.”
Now, let’s say you are investing through typical instruments like Compulsorily Convertible Debenture (CCD), Compulsorily Convertible Preference Share (CCPS) or Non-Convertible Debenture (NCD).
Does investing in startups through these platforms still make sense?
No. Not at all.
Below are the reasons.
First, startup investing is very risky. It is riskier than investing in individual small-cap companies. The failure rate of startups is very high.
Second, liquidity is very low. You won’t be able to sell the share of the startup whenever you want. You have to wait for your exit opportunity. There is no secondary market to sell your shares. Plus, some platforms have a lock-in period of 1 year.
Third, commissions or convenience fees charged by these platforms are too high. They charge 2% while investing and 2% on exit. Plus GST. So you are already down by 4% in the starting itself.
Fourth, returns. To be direct, the chances of your investments returning 10 to 20x are very low. As a small investor, the odds are against you. You don’t have any rights or power to discuss the deal terms. The valuations are usually high on these platforms.
Also, no tax benefits.
You need to understand that investing in startups is a different investment game. Investors realise a profit in 2-3 startups after diversifying their investments in 30-40 startups.
They have enough money and risk-taking ability to lose money on startups. But we don’t.
Don’t invest simply because of your FOMO. If you have figured out your personal finance, goals, investments, etc. and then if you have some money left over. You can give it a try.
Or maybe support your family member’s or friend’s business.
Share it with your buddies.
If you are like us, who likes to analyse a little more or check out content in different formats, well you are in luck. Below you can find some suitable content we found.
Note: We don’t have any affiliation with them. We are sharing links only for educational purposes. The opinions expressed by them belong solely to them and do not reflect the views of Vrid.