World Entrepreneurs' Day: Analysing SEBI's Role in Startup Funding

Today marks a special occasion – World Entrepreneurs' Day.  On this day, we find ourselves immersed in the essence of TICE – Talent, Idea, Capital, and Entrepreneurship – the very building blocks that pave the way for remarkable ventures to flourish.

Talent sets the stage as the first act, where individual strengths and unique abilities lay the foundation for what's to come. Ideas take the spotlight next, birthing the seeds of change. Capital steps in as the third act, providing the resources to transform dreams into tangible reality. And finally, the crescendo arrives with Entrepreneurship, the ultimate stage, where dedication and ingenuity merge to bring the entire performance to life.

Indian Startup Ecosystem

Presently, the landscape extends far beyond the confines of small-scale enterprises, encompassing loftier ambitions. In the present scenario, entrepreneurs embark on their business journeys with a grand vision of eventually materializing into an Initial Public Offering (IPO). India stands abundant with exmaples of startups that have successfully transitioned into the realm of IPOs. Eminent names such as Paytm, Nykaa, Zomato, and Policybazaar grace this roster, with many others adding to the list.

When startups embark on their journey with such ambitious visions, the importance of the third stage, which involves capital acquisition, becomes paramount. Consequently, the role of the Securities and Exchange Board of India (SEBI) gains even greater significance, as it plays a crucial part in ensuring transparency.

SEBI's Eye On Startups

Now as the startup landscape is growing and startups are becoming big and launching their IPOs, the Securities and Exchange Board of India (SEBI) is taking a more stringent approach towards startups willing to launch their Initial Public Offerings (IPOs). The market watchdog is asking the startups to identify their promoters before filing their documents with the bourses. 

The move by Sebi to tighten regulations around IPOs is to ensure better investor protection and prevent the type of meltdown that occurred with new-age technology companies. The regulatory body is also pushing for more transparency and better disclosure from companies seeking to list on the Indian markets.

SEBI Guidelines: Balancing Opportunity & Protection

The rationale behind these regulations is rooted in the unregulated and risky nature of startup equity. Startups carry a heightened risk of fraudulent activities, and SEBI's focus is to protect individuals from substantial financial losses. This is particularly important for those who are financially vulnerable and can ill-afford to suffer significant setbacks due to get-rich-quick schemes, whether in the form of startups or other investment avenues.

SEBI's Efforts for Safe Funding

SEBI's efforts to protect Indian investors, especially those who lack financial literacy, have been commendable. However, as startups establish themselves as a mainstream phenomenon in India, investing in these dynamic enterprises presents a viable opportunity for diversifying portfolios and realizing attractive returns. It's important to note that startup investing is not suitable for everyone. Those with the financial capacity to invest regularly, typically around Rs 20,000 to 30,000 per month, are better off focusing on other investment vehicles like index funds.

The Case for Startup Investing

For individuals who meet SEBI's criteria for investing in private equity and are interested in diversifying their portfolios, startups warrant serious consideration. A general guideline is to allocate 5–15% of one's net worth to private equity and alternative assets, while the remaining portion should be allocated to debt, public equities, and real estate.

The Risks of Investment

While traditional financial theory lumps private equity, including Venture Capital (VC), and real estate together as alternative investments, their risks vary significantly. Real estate investment carries the risk of illiquidity, whereas startups introduce the combined risks of illiquidity and startup failure, especially in their nascent stages.

Startup investing is far from resembling a lottery ticket scenario with extreme outcomes. The odds often favor investors, but the possibility of losing the invested capital entirely due to a startup's closure is substantial. This highlights the importance of diversification. While investing in a single startup is exceptionally risky, a portfolio comprising around 20 startups substantially mitigates the risk of capital loss.

Unlocking Opportunities for Indian Startup Funding

One prevailing misconception in startup investing is the belief that only Venture Capitalists (VCs) reap substantial gains. In truth, the most successful angel investors also realize significant profits by investing in the best startups. Unlike the open public markets where anyone can purchase any stock, the best startup deals often remain private. Access to these deals requires cultivating an extensive network of founders and fellow investors, a process that can span years.

As India's startup ecosystem continues to flourish, navigating the realm of startup investing requires a keen understanding of the associated risks and rewards. SEBI's protective measures have shielded many from undue losses, particularly those less equipped to weather financial setbacks. However, for individuals who meet the criteria and are equipped to handle the risks, startup investing offers an avenue for diversification and potential growth, necessitating a prudent approach that emphasizes diversification and patient networking to access the best opportunities.

Note: The story is written with inputs from the LinkedIn wall of Pushkar Singh, Founding partner at Tremis Capital.