It has been my experience, as also what I have seen of many friends at a similar age bracket, that we have by this time, a reasonably well-balanced asset portfolio, typically comprising of stocks, mutual funds, bank deposits, maybe some real estate, gold, etc. The pie-chart of allocation and the extent of funds may vary from person to person, but these are the typical spaces where our money is probably lying.
And while we see a decent stability and growth in these instruments, there is no way to resist the allure of other formats that show up in our faces, whether it be crypto currency, putting money into film productions, or say, investing into startups. The last-named is especially interesting, as the media keeps reminding us of the number of unicorns India has produced, and you see how young people are making millions, in their startups.
Most certainly, the reality of all of the above new-age or somewhat unconventional forms of investment is that they are fraught with risk, that for every unicorn or success that we read about, there are hundreds who don’t make it, and in fact, several who lose their shirt as well. And yet, there is a temptation towards these new forms of investments.
Personally, at a point, I was tempted to put some money into regional films. But after studying the data that I could get my hands on, I concluded that it was not for me. Likewise, I have not plunged into the crypto space yet, and have a viewpoint on why I don’t do it, and which I will perhaps write about some other day.
But when it comes to startup investments, of course, I have been very close to the space. But more from the other side of the table, where as a startup, we have pitched and raised money, and gone through the whole saga of what it takes to attract investments, what it takes to manage investors, what it takes to exit, etc. Moreover, I have many friends who are investors in startups, and I have had a lot of conversations on startup investing.
Basis all those discussions and my own experience, I have reached the following conclusions from the point of view of being an angel investor, in startups:
- Angel investing / startup investing is a high risk investment, from the point of view of getting assured returns, or the extent of returns. Since it is a high risk, clearly one does these, with an expectation of higher returns. Usually one looks at these, not in terms of percentage points of return (e.g. 15% – 20% etc.), but rather in terms of the multiple that you’d like to earn (e.g. 3x, 5x, 10x etc.).
- In spite of all your due diligence on the startup – good business idea, good founders, good management team, good environment for the business model, etc. – a startup may not succeed. That’s the nature of the beast. So, as a pure investor (as against the original founder), it would not be prudent to put all your money into the 1 or 2 startups. Ideally, if you can, you want to spread your apportioned investment for startup investing, across say, 10 startups. That way, even if 9 of them barely return your invested capital back, the one that succeeds, might succeed big time, making the entire effort worthwhile for you.
- It may not be easy to find 10 good startup ideas to invest into, as an individual. Which is where angel funds or angel networks, come into the picture. Since they open up multiple opportunities for you, and you can pick and choose the ones that work best for you.
- Startup investing is definitely not short term investing. And it is also not very liquid. Which means that once you invest, you may not be able to get your money back or your returns, for say, 7-10 years, sometimes even longer. So, you need to be prepared for that kind of investment horizon, if you are choosing to get into this space.
Considering these above points, and especially the last-mentioned one above, there would have to be an age beyond which, these may not be a good investment idea.
Think about it.
When you invest into say, 8-10 startups, you do need to stay in touch with all of these. You need to keep track of their progress, their further investment rounds, external developments that impact those business areas. You may even use your own network sometimes, to help them make some useful connections. In short, it takes some effort.
Further, from whatever point that you invest, you might need to wait for say, 10 years, to see an exit and returns.
And finally, if you do make that mega multiple on your investments (which is why you are investing), you want to be able to enjoy the fruits of that gain, and spend that money on something you desire.
So, ideally, you should like to exit such higher risk investments, no later than at around age 70 years of age.
Working backwards, what it tells you is that if you do wish to participate in such startup investments, you need to do it no later than at an age of around 55-60 years! If you don’t end up making such an investment till you are around 60, then you may as well opt out of this investment type, and stay put with more conventional options for your investments.