“What’s the use of savings? It hardly provides
enough returns.”
If
someone ask, why is interest rate reducing, the answer is all developed and
high growth economies tend to be business friendly. In that process, cost of
money i.e. interest rate at which individuals or corporates get the funds from
banks, reduces to make putting business venture attractive. If lending to
businesses are low, interest on deposits are lower too. Developed countries
like USA has interest rate of 1.25% on savings, UK has 0.5% and so are with the
other developed nations.
Traditional
avenues of investment in Gold / Silver, Forex, Real Estate, Equity, Mutual
Fund, Fixed Deposit among others have diminishing ROI over the last 5 years. Here
are some statistical facts
- Ø Silver and Gold have slipped from $32 to $17 & from $1608/oz to $1270/oz respectively, over the last 5 years
- Ø USD, EUR & GBP [against Rupees] have moved from 55, 70, 87 to 65, 72, 83, giving returns of 2.7%, 0.5%, -0.8% respectively over the last 5 years
- Ø Sensex moved from 19427 to 31109 and Nifty from 5905 to 9605, giving returns of 10% and 10.4% of an investment on index based funds, over the past 5 years
- Ø FD returns have changed from 8% to 6.25% and trend is reduction in interest rates further
- Ø CAGR returns on Real Estate investments have been roughly about 8% (over last 5 years), 13.4% (over last 10 years), 10.8% (over last 15 years) and 6.2% (over last 20 years) [Source: Morgan Stanley]
Indian prices
are directly proportional to prices quoted above in dollars. All the above
returns are pre-taxed. Trend is not only relevant between the end node points
of these last 5 years but also applicable equally during these last five years.
Investment
in Real-Estate and Gold were giving positive and healthy returns when
substantial investment was being funneled through black money. It is still
possible but it is becoming difficult basis various government initiatives. It may not be worth such a risk.
Alternative
If
better returns are to come from business, why not invest in the business
itself. If you believe start-ups
have a promise in the near future, not only to solve problems in our society
but also for financial returns, please read further on. Investing in the
startups as angel investor, to start with, is new asset class.
India
has caught on start-up culture after USA (Silicon Valley), UK, China and
Israel. Investment in start-ups is being done by family and friends at ideation
stage, by angel investors at seed stage and by venture capitalists at growth
stages. With high availability of quality founders, bright mind and unmatched
passion, many startup founders are succeeding and generating returns of
unparalleled magnitude to their investors.
With
so many startups failing, is investment in startup not risky? Yes and No. Like
any investment – be it equity – primary or secondary, silver, gold, real
estate, etc. you are not sure any longer of positive returns. I will be
surprised to see a portfolio manager committing any returns at all, if not
investing in gold bonds. In that sense, Startups too are risky. However, this
risk can be reduced, just like knowledgeable people who manage your money in
other asset class, The Startup Board and others, who understand due diligence
process, reduce the risk, by considering level of risk consciously. It is just
like in a business.
Consider
the benefits to individual angel investors – a) high possible returns from this
new asset class, b) opportunity to mentor the invested founders and keep a
watch on the risk, c) spreading your risk profile into new asset class,
balancing the portfolio d) enhancing tax incentives for your portfolio, e)
possible position on the board of possible next wave technology startup, to
help solve problems in the society (also making money).
For
big corporates, instead of setting up new R&D or investment into product
development, let it be left to a startup, who can turn-around the idea into
execution much quickly and inexpensively. Services companies, who know little
on product development and management, can better partner and take the offering
to market together, to their customer or startup selling it to others, thereby
getting better traction with low operating expenses. A hands away approach
immune the corporate brand, in case product does not succeed. Both corporate
and startup can avail tax incentives that exists. It also rejigs the innovation
landscape of the organization, from an external catalyst doing innovative
thinking, product development, roll-out, all of which organizations take longer
in refreshing themselves. Startup company, with such close watch, may be good
inorganic investment opportunity too for the corporate.
How to invest
If
you have sensed benefits already, there are multiple ways to go on to identify
the startup and invest. You can do it yourself, take help from those working in
the eco-system and know startups and market trends better, or approach through
chamber of commerce.
Key
parameters needed to look in the startups (in that order) are a) value system
of the founders b) their educational and experiential background c) potential
of the sector in which venture is operating in d) business model of the startup
and e) scalability of the business, model or sector
Once
these basic things are in place, it is all business acumen of the investor or
advisor. Happy investing.
Ashish
Jain is Chief Evangelist at The Startup Board
Published in
Financial Express, Delhi on 10th Nov 2017
