Startups are emerging as a lucrative asset class for retail investors: 100X VC founder

The startup funding environment has been on correction mode most of 2023, with global headwinds, re-evaluation of funding strategies, venture capital maturity and an overall economic downturn. Indian startups merely raised $7 billion between January and September, and seed stage funding dropped 55% year-on-year in the third quarter of the calendar year.

However, some segments, including fintech, software as a service (SaaS) and deep tech managed to pull through with new trends emerging, such as the increased participation of retail or angel investors. Speaking to DH’s Anjali Jain, Shashank Randev, founder VC of early stage venture capital firm 100X VC delved into how the startup sector is navigating the current funding and regulatory ecosystem and the risks associated with this asset class.

Edited Excerpts:

In the current funding winter, how likely are startups to raise capital?

For early-stage companies, it’s a great time. We ourselves have done 62 investments this calendar year alone. Moreover, this system has been there for only 15 years in India, where we have so much domestic capital. There are at least 40 domestic funds, which have opened up over the last five years - that’s significant capital. The only thing is, now you need to move towards profitability, or you have to show that a product is working.

There was never such a great time to conduct business. India has a consumer base of 1.4 billion, and connectivity has improved. So all of these macro factors are in our favour. 

How has retail participation in startup investment been?

We’re seeing a lot of investments coming in from angel investors. These are mostly working professionals, those in IT, or engineers, who’ve been working for 10 years and have expertise and some capital. Apart from real estate and mutual funds, they’ve also started thinking of startups as an asset class. Although, they also understand the risk factor is equally high. But they recognise it as an asset. This is mainly because they saw the kind of returns possible with these investments, much more than any other asset class.

This, however, is not the case in the US. Obviously, this requires a nuanced approach of evaluating and monitoring. But the process has started.

How are retail investors mitigating the risks associated with the asset class?

When VCs come in, they lead the rounds, while angel investors join those rounds as participants. If they are joining these rounds with micro VC funds or angel networks, then their risk is further reduced. Angels always go through processes that have evolved over time to invest in a particular round, so mitigation of risk is taking place at that injunction.

Even then, it is a risky asset because as the company might fail, there’s no guarantee. 

What trends have you noticed in how startups are building their products?

In the B2B segment, the ability to build products and serve consumers is much higher now due to some reasons. India has a huge consumer base and very cheap data. Moreover, reverse migration has ensured that tier II/III cities are also operating at the same level as tier I. So your ability to build out solutions is higher. New products are also gaining traction from younger audiences because they are able to look past the traditionally established brands. Indians are shopping online, but there is a need to discover new products and experimentation.

A lot of startups are getting the opportunity to pitch to older startups for products and services, and hence opportunities in the B2B segment are also emerging. So it’s a great time to be building anything in India.

What is governance like for early-stage startups?

Governance in the early stages, such as seed investments, requires a lot of hand holding. After signing the cheque, the companies are tracking how they maintain their financials, how investor relations need to be, and how they preserve capital. But those processes have to be taught. And I think that’s where seed investors spend a lot of time with the founders. 

How do compliance related issues dampen investor sentiment?

You’ve seen the severe impact of regulations on the gaming sector. Gaming was very hot, continues to be interesting, but now investors have stepped back a little bit. Because no matter how great the technology is, if it’s not going to work in a compliant format in India, then no investor will want to come. Nobody wants to invest Rs 100 and get a tax notice of Rs 1000. That’s why regulation in any sector is considered an important factor by investors.