Is it better to invest in early stage startups than in the stock market?

By Pranat Bhadani|3rd Jun 2015
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Equities have always been considered to be a risky but rewarding bet. Over the past five years the index has delivered an annual average return rate of 14% (average return rate of 10% in the last 10 years). One would have often heard ‘investment advisors’advising to invest a portion of their savings into the equity markets, based on their ‘risk-appetite’. So at a time when FDs and debt funds can give you 8%-12% returns without batting an eye-lid, why is it that millions of investors spend so much time and energy, and take on much higher risk, just to earn a slightly higher return rate?

For one, it is fun, and the work behind identifying potential investments, increases the notional value of the returns in the eyes of the investor, rather than just getting interest on your savings. But even more, is the possibility of having a multi-bagger in your portfolio, one stock that could do for you what Titan did for Rakesh Jhunjhunwala - multiply your investments 100x in a decade. Almost everyone who invests in the market has heard (and is inspired) by the rags-to-riches stories of investors who had put money in the IPO’s of Infosys and Wipro, etc.

Rs.1000 invested in Infosys’s IPO is now worth over Rs 30 crores, and that in Wipro is now worth over Rs 50 crores, but is it okay to expect such astronomical returns now?

India definitely seems poised for great growth in the coming decades and sure the markets will reward the investors as well, but where is it that maximum value will be generated?

Technology has helped us leap at-least a decade in catching up with the developed markets, it has also resulted in lowering the barrier to entry in most segments of the economy, with startups now challenging the mighty in shopping, food, travel, housing and now in healthcare as well. If you look at all the companies that had generated astronomical returns for investors, they all had one thing in common -- they were all ‘startups’at the time of their listing.

Now raising funds through an IPO is the ‘cheapest’capital a company can raise, but it is also a very cumbersome process with much higher levels of compliances and scrutiny, to an extent that it can interfere significantly with the functioning of the company. A few decades back, raising through an IPO was the preferred route as all other sources of financing were equally difficult (so why not tap the cheapest source), but with investor/VC/PE money being so easily available that every high growth-stage company will find it much easier to raise money from professional investors and keep it private than to tap into the complex route of an IPO.

A public listing in India is seen more as an exit for existing investors than as a capital-raising initiative for the company. Flipkart, the poster boy for startups in India, will probably list next year (and that too mostly not in India) at a valuation of over $20B (leaving little room for astronomical returns for the common investor).

Startups can reach a certain scale just by solving existing problems and bringing in efficiencies, but continuous innovation will be the key to sustenance, which brings us to an interesting question: Which listed Indian company is spending on cutting edge innovation? Automobile companies (Maruti, Tata Motors, etc.) currently spending on improving engine efficiencies could be wiped out (by Tesla) if they do not move to electric soon, what would Reliance do with all its refineries then? Unless SEBI creates simple listing procedures for early stage ventures (which it is working on very aggressively), it will be difficult to generate huge returns on your investments in the market. So might I suggest that over longer timeframes, if one is looking for risk free returns - invest in FD’s/Bonds, and if one is looking for much higher returns - invest in early stage startups. #ShunTheMarkets.

(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory)

image credit: Shutter Stock

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