Startup investing in India: Why angel investing is high-risk, illiquid, and suitable only for patient investors with diversified portfolios

The Indian stock market has kept investors on edge over the past year. Global uncertainty, geopolitical tensions, and volatile market movements have cooled the frenzy seen during the 2024 bull run. Even startup investing, once driven by abundant liquidity and aggressive risk-taking, is seeing a more cautious approach. However, stories of founders building billion-dollar companies and early investors making outsized gains continue to capture the interest of affluent investors looking beyond traditional asset classes.

Take Mumbai-based Mahesh Kowshik, a 60-year-old retired project manager, who invested in a startup through his wealth manager nearly six years ago. He invested heavily because he trusted the founder and the person who introduced him to the opportunity. While the business struggled initially, it stabilised after course correction. However, Kowshik is still waiting for a meaningful exit.

Many high net-worth individuals (HNIs) are also drawn to the glamour of startup investing, but face the reality of illiquidity, founder risk, and long holding periods. As per the Ministry of Commerce and Industry, India’s startup ecosystem has over 2.2 lakh startups recognised by the Department for Promotion of Industry and Internal Trade (DPIIT),and more than 130 unicorns.


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However, before you invest in a startup, understand why the reality is far more complex and less glamorous than the success stories suggest.

SUNIL BHARATI
Retired executive, Gurugram
Note:"No startup that I have been involved with has failed because of the idea itself. It has always been because of the founders’ unethical execution.”
Startup exposure
25+ startups through Inflection Point Ventures (IPV).
Approach
Diversified portfolio, active mentoring, follow-on investing in performing startups.
Biggest lesson
Founder ethics and execution matter more than the idea itself.
Reality check: Three startups failed completely and he has not had a cash exit yet.

How to get started

You don’t need to register with the Securities and Exchange Board of India (Sebi) to invest in startups. However, you should set your expectations right. Says Jayesh Faria, Director and Regional Head at Motilal Oswal Private Wealth: “A growing number of investors are getting into startup investing for the wrong reasons. They want to talk about it, keep busy, and think it is another way to multiply wealth. They are relying almost entirely on friends and family for investment opportunities, instead of independently evaluating opportunities.” He calls it the ‘sprayand- pray’ approach—investing in 10 ideas and hoping one delivers a windfall. “This is not investing. It’s speculation,” he warns.

For those approaching it more seriously, Faria outlines three broad routes: joining an angel network; investing through a friends-and-family connection; and investing through Alternative Investment Funds (AIFs), Venture Capital (VC) funds, or curated platforms.

Apart from large national platforms, many investors also enter startup investing through smaller regional angel networks in cities such as Mumbai, Bengaluru, Pune, Hyderabad, and Ahmedabad. These networks typically bring together local founders, business families, professionals, and HNIs to collectively evaluate and invest in early-stage companies. These offer valuable peer learning and access to regional deal flow, though the quality of due diligence and governance standards can vary across groups. Faria says that curated platforms are the best starting point.

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“Friends-and-family investing is always risky because you are either impacted emotionally or by the respect for the person giving you the tip,” he says.

Angel networks, where a group of investors collectively evaluate and fund companies, are better, but still carry the risk of herd behaviour. Curated platforms, by contrast, conduct due diligence before the deals reach you, handle legal paperwork— equity structures, convertible notes, Compulsorily Convertible Preference Shares—and remove some of the complexity that trips up first-time investors.

Shweta Rajani, Head of Mutual Funds at Anand Rathi Wealth, echoes this, recommending that first-timers opt for angel networks, syndicates, or startup-focused funds over direct deals. “Startup investing carries high business failure rates, illiquidity, governance risks, and valuation uncertainties that are genuinely difficult to evaluate without experience,” she says.

AIFs and VC funds, on the other hand, are Sebi-regulated, but their minimum ticket sizes make the entry difficult.

How much is needed?

Rajani notes that a ticket size of Rs.30-40 lakh, which may seem substantial, is actually too small to build a meaningful startup portfolio. To diversify effectively across companies and funding stages, you would need a minimum of Rs.1-2 crore. To do it without affecting your financial stability, your total investible portfolio should be in the range of Rs.25-30 crore or more.

For those who do clear this bar, Faria recommends capping the startup exposure to 5% of liquid financial assets. A Gurugrambased retiree, Sunil Bharati, who has been investing in startups for three years, suggests the same. He invests through the curated platform, Inflection Point Ventures (IPV), and has a portfolio of over 25 startups. “If you have Rs.10 lakh to invest in startups, you could start by investing Rs.50,000. Once you start understanding how the ecosystem works, you can gradually increase the investment, but it should never be more than 10-15% of your total savings.”

Bharati’s experience offers the clearest window to what startup investing is all about. He joined IPV about four years ago after looking for a way to deploy his expertise in retirement, and started investing a year later. His portfolio, on paper, has grown, and he has exercised preemptive rights to invest in follow-on rounds in the startups that are performing well. “My expectation is not just to make a profit after a few years. The big prize is if somebody gains from my experience,” he says.

What are the regulations?

From a regulatory standpoint, startup investing in India is relatively easy. There is no mandatory qualification to invest directly in a startup as an individual. However, it becomes more structured depending on the route you take. Angel funds operate under Sebi’s Category I AIF framework. Following regulatory changes in 2025, angel funds can raise money only from accredited investors, a category that includes individuals and entities meeting Sebi-prescribed income, net worth and certification criteria.

The revised rules also removed several restrictions, including minimum corpus and investment threshold for angel funds. However, such funds must have at least five accredited investors before declaring their first close. These are institutional investment vehicles, rather than structures individual investors set up on their own.

For investors accessing platforms or networks, startup deals are often structured through syndicates or pooled vehicles to comply with regulatory requirements and simplify the investment process.

As for taxation, gains from unlisted startup equity held for more than 24 months are subject to long-term capital gains tax at 12.5%. Short-term gains on holdings of less than 24 months are taxed as per the income slab. Given the typically long holding periods in startup investing, most successful exits fall under the long-term category.

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How to evaluate a startup

In the absence of a universal framework for evaluating startups, certain fundamentals hold. Faria breaks it down into three layers: business model (what it is, how it will make money, why it will succeed); founder (track record, qualifications, ability to execute through adversity); and documents (what equity instrument is being received, if there is proof of concept, and if any intellectual property (IP) has been secured).

Rajani adds a more structured lens for experienced investors: market size, scalability, revenue visibility, unit economics, competitive advantage, cash burn, and future exit potential. These are the same metrics institutional investors use.

Bharati, who mentors 14 of his 25-plus portfolio startups and takes quarterly calls with founders, has developed a particular focus over the years. “No startup I have been involved with has failed because of the idea itself. Failures have always been because of the founders’ unethical execution.”

He now considers whether the founding team has bootstrapped the business before seeking outside capital. “If they have put in a significant amount and are asking for more to scale, the confidence level is higher,” Bharati adds. He learnt one of the most important lessons the hard way. A founder in his portfolio changed the entire business model after receiving investment, without informing the investors. The venture eventually collapsed. “During due diligence, the platform and investors need to test the ethical behaviour and honesty of the founding team,” he says.

Building a portfolio

Startup investing only works as a portfolio play. A single investment, no matter how promising, is not a strategy. Rohan Paranjpe, Managing Director, Waterfield Advisors, recommends at least 25-30 companies over a 2-3-year period. To build such a portfolio in any discipline, you would need to evaluate 150-200 companies, with roughly two meetings a week, consistently over two years. “If you don’t have the bandwidth, you probably shouldn’t be doing this,” he says.

Shanti Mohan, Founder and CEO of LetsVenture, a startup investing platform that connects investors with startup fundraising opportunities, suggests investing in at least 20 companies over five years, with minimum Rs.10 lakh deployed annually. The goal is a compounding portfolio return, which only becomes visible once you have enough data points across the portfolio. Faria suggests against committing a fixed amount annually. Instead, he advises evaluating each opportunity on its merits, adding to positions in good performers, and willing to call time on those that are not.

Minimum amount you’ll need to start

MAHESH KOWSHIK
Retired project manager, Mumbai
Note:"At the time of investment, every founder paints a very beautiful picture. You must be prudent enough to see what lies behind it.”
Startup exposure
Invested in one startup through a wealth management connection.
Approach
Invested largely based on trust in the founder and referral network.
Biggest lesson
Founder diligence and sectoral experience are non-negotiable.
Reality check
The business struggled initially, and though it stabilised at a later stage, he is still waiting for a meaningful exit.

When do you start earning?

You make money from angel investments in startups when you exit. This is tricky because startups are unlisted, and you can’t sell your shares in the stock market, unlike listed companies. These are illiquid, unless there’s a buyer willing to take your place. Broadly you have three options: the company is acquired; it goes public via an initial public offering (IPO); or an investor buys your stake in a secondary transaction. In successful companies, you usually have options. In unsuccessful ones, you may have none.

Paranjpe is candid on failed investments: “If a company isn’t successful, usually no investor is willing to come in, there is no acquisition on the horizon, and no IPOs. If you want to write off the investment, the cleanest option is to sell the shares back to founders at nominal value. However, founders often refuse, other investors may object, and the process requires approvals and sign-offs that investors rarely have the leverage to force through.”

This is one reason he recommends investing through VC funds rather than doing it directly. VC funds sit on company boards, coordinate across investors, and have the institutional clout to close underperforming positions in ways that individual angels cannot.

Faria offers a practical exit framework for those who invest directly. Exit when you have hit your target return, targeting an 8-10% return premium over listed markets, which translates to roughly 30% if broad-based indices return 15-20%. Exit if the business is not tracking its own projections, or your original investment thesis no longer holds. Rajani sets honest expectations on timelines: plan for 7-10 years for any meaningful capital realisation. Some investments will generate no exit at all.

Not everyone belongs here

Startup investing, especially through the angel route, is not suitable for most. Paranjpe says, “The only people suited to angel investing are founders who understand how private markets work and have a strong network of other founders approaching them for advice.”

The best founders go to VC funds first, and if these pass, they approach large family offices. Ironically, many angel investors notice if any institutional investor has declined the startup’s funding request. It is a problem known as adverse selection that most first-time investors never consider. Conservative investors should avoid investing in startups entirely, says Rajani. For those with a higher risk appetite and for experienced investors, she recommends allocating 2-5% of the overall portfolio.

India’s startup ecosystem is real, large, and growing. The opportunity is genuine. But startup investing is not a wealth-creation shortcut available to anyone with a surplus. It is a long, illiquid, high-attrition asset class that rewards expertise, networks, patience, and portfolio discipline above all else.

If you have a significant edge with deep sectoral knowledge, a founders’ network, or the time to engage with companies and capital to build a portfolio without touching the money you need, there is a case for participation. If you’re doing it because the stories are exciting, invest that money elsewhere.