Precautions to be taken by Foreign Investors before investing in Indian Start-ups: Lawyers Advice for Foreign Investors for their Investments in India | FDI Attorney in Delhi NCR | FDI Attorney in India | India Business Entry
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Startups have begun to take a new look in India, with the youth coming up with great business ideas with extraordinary business potentials. More and more investors have started to look towards startups as a great investment option with high returns. In 2019, Indian tech startups alone are able to raise $14.5 Billion funds. Therefore, investors are becoming more interested and inclined towards investing in startups in India. However, in order to ensure a safe investment and highest returns it is necessary to take certain precautions.
Precautions to be taken by Foreign Investors before investing in Indian Start-ups are:
UNDERSTAND THE INDUSTRY: An investor should invest only in industries which he understands and has knowledge about. An investor should not be caught up in the hype and invest in an industry without reading up and understanding the industry.
SIZE OF COMPETITION: The investor should study competition in the market for the same product and look for features not covered by them and how quick can they be adapt to the new feature brought in by the startup.
KNOW THE TEAM: Success or failure of a startup depends primarily on its execution by the team, therefore, it important to ensure that the founders have the experience and the capability to achieve the goal by looking into their history and current prospects.
REVIEW FUTURE FUNDING PLANS: It is important to understand the plans for the next round of capital. It is key to understand on what they plan to spend it on. How much will it cost? Through what way the capital would be raised? Would it lead to dilution of control? It is important to understand these issues before investing the money.
CONDUCTING DUE DILIGENCE AT THE PRE INVESTMENT STAGE: The foreign investor should ensure that a proper due diligence is conducted by an expert team of professionals which shall ensure the protection, safety and security of the investments which are to be made.
CONDUCTING LEGAL AUDITS AT THE POST INVESTMENT STAGES: There is always a need to conduct regular and repeated legal audits which the foreign investors should seriously undertake. The same helps in not only complying with the Indian laws but also acts as a shield in order to safely handle any legal issues and legal problems which might come up in future.
GO THROUGH LEGAL DOCUMENTS: An investor should look into documents like Articles of Association, by-laws, etc. as it would give some clarity on as to how the company was formed. It is important to make sure that the startup is working in an ethical manner and fulfilling all the legal obligations, so that the investment is not wasted in shady businesses.
UNDERSTAND THE RISK: With the potential of high returns, the investors runs the high risk of losing all his money in case the business fails and if it is not being implemented in the way it was thought to be implemented. An investment in a startup is there always referred to a High risk, High return investment.
MAKE DIVERSE INVESTMENTS: As per the saying that it’s never wise to put all your eggs in one basket, an investor should make investment in multiple startups working in diverse sectors. This helps to maintain a balance in case a startup or a particular sector fails to give any returns.
HAVE A FINANCIAL PLAN: Investors should honestly assess their financial capacity and risk tolerance before investing in any company or startup. Startup takes time to come into full flow and to start yielding returns for the investor. Usually it takes 8-10 years in India before the investor starts getting any significant return from the investment in a startup.
MAKE SURE YOU GET FULL INFORMATION: Entrepreneurs while pitching a business idea tend to withhold certain key information from the investor, fearing disclosure of the whole business idea which has not yet been implemented. This might make the investor to assume the business to work in a certain way which might turn out to be completely different when it is actually implemented.
INVESTIGATE THE FINANCIAL: It is important to for the investor to look into the financials of the startup. It will help the investor gather details about the assets, liabilities that one may have overlooked and any other potential revenue. You can also see how the money is currently being utilized by the startup.
India in the past few years has witnessed an increasing numbers of foreign investors investing in Indian startups. United States based investors, Tiger Global has backed some of India’s largest start-ups, such as Flipkart, Ola, and ShopClues. Hong Kong based Saif Partners, have backed firms such as Paytm and Urban Ladder, have closed a large number of other deals as well. Further, US based Accel Partners made its largest investment in Flipkart through the overseas unit rather than its Indian unit.
Investment in a startup is clearly an attractive investment option with high return potential, however, it comes with many risks. Therefore, before an investor decides to invest in a startup, he/she should take into consideration the above mentioned precautions in order to minimize the risk and maximise their chances of getting return from the investment.
Authored By: Adv. Anant Sharma & Ananya Jain