For any individual considering investment in startups, there exist primarily two avenues to explore: direct investment and indirect investment.
Direct investment involves a hands-on approach, necessitating thorough examination and comprehension of a business’s potential before committing capital. Examples of direct investing include purchasing equity in the stock market or acquiring real estate for potential appreciation.
This method places the entire responsibility on the investor to discover investment opportunities, conduct due diligence, evaluate a business’s potential, and handle legal aspects. While direct investment does offer some level of personal connect, control and influence over the invested venture, as well as exit options, one must question whether it’s worth the associated complexities.
For investors managing a substantial portfolio of direct investments, it becomes exceedingly challenging to stay informed about each investment, review management information system (MIS) reports, and provide assistance to startups.
As startups secure additional funding rounds, direct investors often find it difficult to participate directly due to the increasing capital requirements, especially when startups are performing well, leading to larger ticket sizes.
Additionally, predicting the future and identifying startups, which will succeed can be a formidable task for event experts, less said about the direct investors.
On the other hand, indirect investment typically involves becoming a Limited Partner (LP) in a venture capital (VC) fund. In this scenario, the investor places their capital into a VC fund that, in turn, invests in multiple startups rather than just one or two.
VCs typically operate with a team of experts specializing in finance and startups. They possess extensive connections within the startup ecosystem and access to information not readily available to the public, such as Gartner and Forrester reports. VCs also gain strategic control or influence over businesses, and due to the diversified nature of their investments, they can mitigate risks effectively.
VC firms often employ a follow-on funding strategy, ensuring that they increase their investments in portfolio startups that exhibit strong performance.
In conclusion, unless you are a seasoned investor skilled in identifying growth-oriented startups and capable of managing a substantial portfolio, it is advisable to opt for the indirect investment route by partnering with VC firms as a Limited Partner.
