How to Invest in Startups in India? 

Have you ever considered investing in a company before it becomes the next big thing? From small ideas to billion-dollar unicorns, India’s startup ecosystem is brimming with possibilities.

The Department for Promotion of Industry and Internal Trade (DPIIT) has formally recognised more than 1.59 lakh startups as of January 15, 2025, compared to only 500 in 2016. Backed by over 100 unicorns and a generation of bold, technologically adept entrepreneurs, India has become a fast-growing nation and is now the world’s third-largest startup ecosystem.

Since this trend is being followed by many, investors are looking to startups as the next growth frontier. But how to invest in startups in India? Let us understand. 

What is Startup Investing?

It refers to investing funds in startup companies to earn a return on investment (ROI) after some time. It entails investing funds into a business in return for equity, debt, or convertible securities. 

Startups are generally businesses in the formation stage, with new business models, products, or services. Startup investing is meant to aid these businesses through the growth phase by providing them with the funds they require to expand their activities and become profitable.

Why Invest in a Startup?

Here’s why some people choose to invest in startups:

• Startups usually focus on solving a specific problem or addressing a gap in the market. This gives them a high growth potential, which can bring big returns for you.
• Investing in startups at an early stage gives you an advantage in ownership stake and valuations.
• Startup investing allows you to diversify your portfolio beyond traditional asset classes like stocks and bonds.

Risks of Investing in a Startup

Startup investing isn’t all upside. Before you understand how to invest in a startup, here are some risks to consider. 

• High Failure Rate: Startups are inherently risky ventures with a high failure rate. Only a small percentage of startups survive beyond five years, and you may risk losing your investment.
• Liquidity Risk: Unlike publicly traded companies, startups are not liquid. Thus, it may take several years for you to exit your investments.
• Regulatory Risk: Regulatory changes greatly influence startups, and you may risk losing your investment.
• Lack of Information: Unlike publicly traded companies, it is not necessary for startups to disclose financial information. This lack of transparency can make it difficult for you to judge the venture. 

How to Invest in Startups?

Understanding how to invest in startups in India is very important. Here are some ways through which you can invest in startups in India:

1. Online Investment Platforms

Online platforms such as LetsVenture, AngelList India, and Tyke can help you invest in startups in India. They handle preliminary screening, showcase promising startups, and streamline the entire investment process from discovery to documentation.

2. Angel Investing

Angel investors are typically high-net-worth individuals who invest their own capital in startups in exchange for equity in the company. These angel investors may provide seed capital to startups in the earliest stages of development, when startups are not yet able to secure funding from traditional sources such as venture capitalists.

Angel networks such as Mumbai Angels, Indian Angel Network, Chennai Angels, Lead Angels,  etc., can give you access to startups. 

3.  Venture Capital Funds  

You can invest in a startup through venture capital (VC) funds. They pool money from institutional and wealthy investors to invest in startups with high growth potential. These funds follow a defined strategy, targeting particular industries and company stages. In return for capital, VCs receive a share in the company and provide mentorship and strategic input.

In India, these funds are registered as Category I AIFs (Alternative Investment Funds) and are governed by SEBI (Alternative Investment Funds) Regulations, 2012. 

4. Venture Debt Funds 

Venture debt is a type of debt financing that is provided to startups by specialised lenders. Unlike traditional debt financing, venture debt may come with equity-like features, such as warrants or options. It gives the lender the potential for additional returns if the startup grows and becomes more valuable. They usually invest along with an angel or VC round.

5. Private Equity 

Private equity (PE) firms invest in private companies, including startups, to generate a return on investment over time. PE firms may use a variety of investment structures, including equity, debt, or a combination of both, and may focus on already established startups and generating revenue.

PE funds in India are registered as Category II AIFs. To invest in these funds, you must comply with specific rules and guidelines laid down by SEBI.

You can also participate in startup investments by purchasing unlisted (pre-IPO) shares through select platforms. 

Final Thoughts

Investing in startups in India can be a promising investment opportunity for UHNWIs and institutional investors looking to diversify their portfolios. 

However, it is important to understand the risks and benefits of startup investing and consider the necessary factors before investing. With the right approach and due diligence, startup investing can be a potentially rewarding experience for UHNWIs  in India’s thriving startup ecosystem.

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