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Retail investors eye India's lucrative startup ecosystem

Bengaluru-based internet broking platform Zerodha working to set up a fund to enable retail investment in early-stage startups

Itika Sharma Punit  |  Bengaluru 

Indian start-ups, which have attracted top global venture capital (VC) and private equity (PE) players, are now wooing individual retail investors in the country.

Nithin Kamath, the founder of Bengaluru-based online trading platform Zerodha, has been flooded with requests from his clients, who have so far invested in stocks through his start-up but now want to bet on start-ups.

The lure is justified, as estimates by show investments in early-stage start-ups have given compound returns of 40-50 per cent in the past few years, against around 25 per cent in stocks. Additionally, shares have become expensive over the last few months and experts believe the returns might be tepid going forward.

In view of the same, Kamath is now working to set up a fund. The fund plans to pool in money from several individuals and invest in start-ups. The fund is estimated to have a corpus of around Rs 30-50 crore initially. Kamath said the company is in the process of getting regulatory and legal approvals for the same.

“We plan to enter a start-up when it is at Ground Zero and then take it to a stage where a VC enters and we can get an exit,” Kamath told the Business Standard. “We have around Rs 30 crore of our own that we are ready to invest in start-ups, and additionally, there are several individuals who are willing to partner with us. While the risk of investing in start-up is higher than in stock exchanges, the trend has shown that returns are very attractive,” he added.

Last year, Wadhwani Foundation, a not-for-profit organisation founded by the US-based NRI billionaire Romesh Wadhwani, had also said it attempts to create a network of high-network individuals (HNIs) who could turn angel investors in order to promote fledgling start-up ecosystem in India. The Foundation had said it aims to get around 5,000 HNIs on board for the venture.

Started in 2010 by stock trader Kamath, introduced the concept of flat brokerage on stock market trading. The company charges Rs 20 on every trade done through its platform. According to the company's website, is among the top volume contributors on the National Stock Exchange (NSE), BSE, MCX-SX and MCX, with average daily turnovers of over Rs 5,000 crore. With over 55,000 clients, Zerodha had profit before tax of around Rs 35 crore in FY14 with an operating margin of over 30 per cent.

Recently, Zerodha also set up a start-up incubator called Rainmatter, where it provides young office space, mentoring, and funding of around $100,000-$500,000 each. So far, the company has incubated one start-up called TradeLabs at Rainmatter.

A majority of investments in Indian start-up ecosystem currently require a long gestation period before seeing a profitable exit. However, Harish Padmanabhan, one of those who have expressed a desire to invest in start-ups through Zerodha's planned fund, believes that the risk is not as high as the returns can be.

“The most common investment in India is land, and there is no instant return visible, but people buy land and wait for 5-10 years to see it appreciate,” said Padmanabhan, an Indian Institute of Management-Bangalore alumnus who runs a firm called Kanchan Integrated Property Development.

“In case of start-ups, you invest in a team of professionals and you have the satisfaction that the team is building something productive. Also, in a start-up investment, you know that if the team is getting incubated properly, then I see no problem in getting returns at all.”

  • 40-50%
    Compound returns early-stage start-ups have given in the past few years, estimates by Zerodha show
  • 25%
    Compound returns on stocks over same period, says Zerodha

First Published: Sat, March 28 2015. 22:45 IST