Investing in Indian Startups
Are you an NRI considering investing in an Indian startup? Great! However, before you jump in, there are a few crucial things you need to understand.
Understanding the Indian Market:
The first and foremost question you need to ask yourself is, what do you know about India? Even if you are an NRI, this question is still applicable to you with the new generation and changing market dynamics. To better understand India, you need to be a resident and well aware of the current Indian market.
Just as you cannot build a successful business sitting outside the market, you cannot analyze a business for investment from a distance, especially if the target market is local. You or your trusted buddy have to be on the ground and cannot rely completely on hired people there. You will be fed with manipulated data, and your decision is sure to go wrong. You cannot hold anyone accountable for incorrect data, no matter any signed documents, because every contract is just a piece of paper there. If you want to enforce, you have to keep your main objective aside and get into potentially significant legal involvement.
Understanding the Indian Landscape:
Understanding the different generations, states in India & their respective culture is crucial for evaluating founders, their personalities, and the authenticity of them & their startup vision.
Beware of Hype and Brokers:
You may be sitting on a few pitch decks, the first thing you need to understand is who approached you with the pitch deck. Is it the founders or some middleman? There are too many brokers trying to secure funding at hyped valuations. These individuals will build a bias with manipulated data in your mind for the startup and their founders before you even start doing your own research.
In reality, the brokers are the real winners in this game of startups and make money with very little effort, leveraging their connections and networks. Most brokers are good at talking but never dare to build any startup. Historically, matchmaking is a well-rooted profession in India. Brokering for funding is nothing more than matchmaking, and such a brokering business is always profitable in India.
The VC Culture:
VC firms often employ highly educated individuals who invest in public or HNI funds with a high failure rate (approximately 10:1). This reality has created a culture where founders prioritize short-term gains and have limited ethical responsibility towards investors. Many new entrepreneurs aim for instant wealth, lacking the adherence to the vision, long-term commitment, and ethical considerations of investors.
Evaluating Founders:
Thorough due diligence is crucial when evaluating founders. Consider their personal, social, and family backgrounds, online presence, and educational qualifications. The Indian funding market is very much biased toward IIT and IIM graduates, so don’t be surprised to find dummy founders on the deck for the namesake. Those may be just decorative items on the pitch deck; in reality, those founders may not even be involved in the startup, perhaps completely unaware or getting the monetary benefit of funding. You will need to do a real background check for every founder and their involvement before even having a conversation with them.
It would be wise to send them a series of “Why,” “What,” and “How” questionnaires and try to understand them. In my view, the most important question to ask would be how much of their own money they put into their venture. Keep in mind, in India, money is a major driving force, unlike in the Western world where time takes the edge over money. People will put in any amount of time and effort but not their money. Serious founders who are ignited with vision must have an impactful amount of their own invested at an early stage before they reach out to any investors, which means they get started without waiting for someone else to fund their vision.
Avoiding Hype and Empty Promises:
Many Indian startups have historically raised funds with unrealistic business models and a focus on short-term personal gains rather than profitability. They often rely on flashy presentations, exaggerated data, and big talk to secure funding from foreign investors and NRIs. These funds are then often spent on unrealistic marketing in the name of CAC and self-promotion
NRIs: Be Cautious and Invest Wisely:
NRIs need to be extra cautious when investing in India. Avoid emotional decisions and evaluate potential investments critically. Remember, you may be seen as an easy target for exploitation.
Disclaimer:
This article is not intended to hurt anyone’s feelings. It aims to share my own experience and provide valuable insights for fellow NRI investors.
