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Do You Want to Invest in Start-ups?
Mon, 8 Feb Pre-Open

Start-up stories are all over the news. The news is not always good. But the success stories are compelling. The media makes the promoters look like geniuses. The valuations these companies attract are truly mind boggling. So much so, that a new word has entered our lexicon: Unicorn. These are the firms that have achieved a valuation of US$ 1 billion. Stories like Flipkart, Snapdeal, Ola, and the like, have an enticing allure to them. More young people than ever before have started dreaming about making it big in the start-up space.

And can Indian investors be far behind? So far most of the Indian start-ups have received foreign funds mostly. Large PE, pension, and VC funds have pumped tons of cash in to these firms due to lack of investment opportunities in developed counties. Indian investors have also jumped on the bandwagon.

As per an article in the Hindu Business Line, Ratan Tata, Chairman Emeritus of Tata Sons has picked up stakes in 25 start-ups. As per Mr. Tata, it’s less challenging to invest in start-ups compared to investing in the stock markets. This is because they have less money on the line tied up in big risky projects. In order words, even if these companies were to fail, the absolute amount of wealth lost will be far lower compared to listed companies. While this is true, we believe retail investors should not even think of investing in start-ups.

The reason is simple. Venture capitalists spread their risks over many investments. They hope to make huge returns in only a few of them. Even if most of the start-ups fail, they won’t be too disappointed because the winners will make up for the losers. However, this is too much of a risk for retail investors we believe.

As we have stated in various editions of the 5 Minute WrapUp, this risky game is best left to the VCs. The stock market offers more than enough opportunities for retail investors to make good money by taking far lower risk.

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Mar 19, 2018 (Close)