How Can NRIs Invest in Indian Startups?

As per a source, foreign investment in India’s startups has dipped 72% to $4.58 billion. But, the year 2022 was different. These companies had got $16.2 billion of funds last year.

In all, this bearish trend can be an opportunity for non-residents of India to invest and yield profit over time.  As an NRI or non-resident of India, investing in an Indian new company comes up with an opportunity to support emerging businesses and potentially earn attractive returns. There are several options and possibilities for these emigrants to invest in Indian up-and-coming companies.

But the question is where to start with. This post will help find that way.

Tips for NRIs to Invest in Indian Startups

Consider these key points as investment options in India. For proven solutions, a consultant can better define them.

  • Angel Investing

NRIs can consider angel investment, which happens by directly investing in early-stage companies in India.

They can leverage their expertise, networks, and capital to support promising new ventures and contribute to their growth.

Undoubtedly, angel investing typically involves higher risks. But, you can also yield significant returns if the startup succeeds. You as an emigrant Indian can join angel investor networks, attend emerging company events, or connect with local incubators and accelerators to identify investment opportunities.

  • Venture Capital Funds

This is the second option, which is to invest in venture capital funds that focus on Indian startups.

Venture capital funds pool investments from various individuals, including non-residents, and invest in new ventures on their behalf.

This alternative allows emigrants to gain exposure to a different portfolio of these emerging companies and experience benefits from the expertise of professional fund managers.

Here, one thing is a must, which is research & due diligence on the track record and investment strategy of the venture capital fund.  These are essential before investing.

  • Private Equity Investments

Non-residents have an opportunity to explore private equity (PE) investment options in Indian launch-ups, especially in growth-stage companies. Actually, PE firms invest capital and expertise to fuel the scalability and development of established companies.

NRIs can consider investing in PE funds, which specifically target the Indian market or have a sector-specific focus aligned with their interests.

  • Crowdfunding Platforms

NRIs can also try investment in Indian early-stage companies through crowdfunding platforms. They connect investors with early-stage businesses.

Crowdfunding allows them to start by investing smaller amounts alongside other investors. This opportunity enables them to add diversity to their investment portfolio.

These platforms often provide detailed information about new ventures, their business models, and growth prospects.

  • Government Initiatives

The lenient policies and various initiatives of the Indian government have encouraged innovative new company investments, including those from NRIs.

These emigrants can come across programs like the Startup India Initiative, which offers tax benefits and funding assistance to these companies.

Through these initiatives, non-residents can directly invest in Indian incubated businesses or contribute to funds, which are dedicated to supporting them.

  • Co-Investment Opportunities

Under this option, non-residents can partner with local investors or established venture capital firms to co-invest in Indian early-stage ventures.

Co-investing allows them to leverage the expertise and local networks of their partners while sharing the risks and potential rewards. Starting with building relationships with trusted local partners can provide access to a broader range of investment opportunities.

  • Convertible Notes

NRIs can consider investing in up-and-coming companies through convertible notes. These are debt instruments that can convert into equity in the future. This investment opportunity provides a way to support startups at an early stage while deferring the valuation and equity allocation until a later funding round.

With this option, emigrant Indians can invest in emerging companies with a lower initial investment amount and potentially benefit from a discount or other favourable terms during conversion.

  • Direct Equity Investments

This diaspora can directly invest in Indian fresh companies by purchasing equity shares. If you find them a good investment alternative, you can negotiate the terms and conditions with the startup founders, and hence, invest in their companies. Direct equity investments provide the opportunity to have a direct stake in these companies’ growth and success.

But, this can be risky. So, it is crucial to conduct thorough due diligence and seek legal advice to ensure compliance with Indian regulations and protect their investment.

  • Technology Business Incubators

This alternative is to do partnerships with technology business incubators in India. These incubators provide support, mentorship, and infrastructure to new ventures, often in exchange for equity. Emigrants can join as a mentor or advisors to contribute their expertise and potentially invest in the startups incubated by these programs.

  • Peer-to-Peer Lending

The last option is peer-to-peer lending platforms that act as a bridge between borrowers (startups) and lenders (investors).

These platforms allow NRIs to lend money to early-stage companies directly, earning interest on their investments.

Beforehand, it is suggested to assess the creditworthiness and risk associated with each borrower before participating in peer-to-peer lending.

Important Considerations

  • Regulatory Compliance: NRIs must comply with the regulations set by the Reserve Bank of India (RBI) and the Foreign Exchange Management Act (FEMA) while investing in Indian new ventures. Understanding the regulations, investment limits, repatriation rules, and tax implications is crucial.
  • Due Diligence: Thorough research and due diligence are necessary before investing in any emerging company. Evaluating the business model, market potential, competition, team strength, financials, and legal aspects can help make informed investment decisions.
  • Risk Management: Investing in startups involves risks, including the potential loss of invested capital. Diversification across multiple new companies and sectors can help mitigate risk.
  • Professional Advice: Seeking advice from financial advisors, legal professionals, or investment consultants with expertise in Indian new ventures and regulations can provide valuable insights and guidance throughout the investment process.

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Conclusion

NRIs have various investment opportunities in Indian startups. They can participate in angel investing, venture capital funds, or co-investment opportunities. Investing in these companies allows them to support emerging businesses, contribute their expertise, and potentially earn attractive returns. Additionally, government initiatives, crowdfunding platforms, and direct equity investments offer avenues for NRI participation in the vibrant startup ecosystem of India.

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