WHAT IS THE JOB OF VC INVESTORS?

The boom in the Indian Startup Ecosystem has made the seed and angel investors bullish and powerful in nature. This statement could be verified by considering the statistics for the last year Indian companies attracted US$10 million and by the quarter ending of March 2019 the total funding that these startups have raised during was US$3.42 billion which is about 40 per cent more than the same quarter last year. The rise in the amount of funding has also raised the bars for the investors while selecting the startups. Investors nowadays are looking for highly promising startups.

Investing in startups is regarded as a high-risk, high-reward and highly illiquid asset class therefore it is very risky to invest in a startup for the simple reason that there is a chance that the investors might lose their money. But then why do these investors spend on startups? This is because despite high risk there is a component of high reward that they will receive if the startup succeeds in its venture.

Looking at the current market scenario, 90% of startups fail but does this fact stop the investors from investing in it? Definitely not. Let’s consider an example where an investor invests in 10 startups. There is a high possibility that 3-4 of those startups will fail, leading to an absolute loss of investor’s money. Another 3-4 startups will return the principal amount, leading to a no loss no gain situation for the investor. But there are going to be at least 1 or 2 startups that will not only provide enormous profits but also make up for all the losses suffered due to investing in failed startups. The only job of a good investor is to identify those highly promising startups.

During the 1980s and 90s, the investors made gigantic profits by investing in tech giants like Amazon and Microsoft after their Initial Public Offering (IPO) but the trend has changed now, most of the value creation happens by investing in early-stage private companies. It is also said that if you wait until the company goes public, you are actually missing out on 95% of the gains.

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