Should you invest in startups through platforms like Tyke?

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By Arnab Ray

The world of investing is undergoing a paradigm shift. Previously, investing in startups was a game reserved for the wealthy elite or venture capitalists. Today, platforms like Tyke, and Grip are democratizing this space, allowing individuals to invest in the next potential unicorn. But, with these opportunities come several risks. In the age of financial evolution, where new investment opportunities arise almost daily, these platforms have caught the attention of many. Offering a portal into the dynamic world of startups, these platforms promise high returns. But with every investment’s highs come potential lows. Let’s decode the startup investment landscape, ensuring you understand every nuance before taking the plunge. So lets analyze, is this avenue right for you?

Understanding the Playing Field: Tyke, and Grip in the Spotlight

In layman’s terms, Tyke and Grip are online platforms that connect everyday investors with startups seeking funds. They bridge the gap between budding entrepreneurs and those willing to support their visions monetarily.

Tyke is primarily focused on helping investors buy stakes in startups (unlisted companies) directly. The catch is that these startups aren’t traded on traditional stock exchanges like the National Stock Exchange (NSE) or Bombay Stock Exchange (BSE).

On the other hand, Grip offers a multi-asset alternative investment platform. Not just limited to startups, they provide diverse options like asset leasing and corporate bonds.

Given its success and popularity, I’ll narrow the focus of this analysis to Tyke.

The Allure of Startup Investments

It’s the age-old story of “risk versus reward”. Startups, being nascent businesses with innovative ideas, have a high growth potential. An investment here could multiply manifold, turning modest sums into fortunes. Startups are businesses in their early stages, driven by innovation, addressing a market need, or offering a novel solution. Their potential for exponential growth makes them a tantalizing investment prospect. Yet, the risks are just as substantial.

The Investment Journey: How Does it Work?

Once you’re registered on platforms like Tyke, you can browse a curated list of startups seeking investments. When a startup piques your interest:

1. Due Diligence: Platforms provide extensive information about the startup, its business model, team, financials, and more.

2. Choose Investment Type: Depending on the platform and startup, you might have multiple investment options, ranging from buying equity to debt instruments.

3. Invest: Once convinced, you can pledge your amount and become an official investor.

The Investment Modalities

Unlike investors like VCs or angels, Tyke has its own unique investment instrument called CSOP (Community Stock Option Pool). There’s a reason for such an instrument which I have described below. In addition to this, Tyke offers a suite of alternative investment options listed below:

  • CSOP (Community Stock Option Pool): “A CSOP is a contractual agreement executed between a subscriber and the company. The agreement entitles the subscriber to community benefits and the potential to be granted Stock Appreciation Rights (SAR).” – Tyke Website. Let me put it in a simpler term. When you invest in a startup through CSOP, you do not really get a share, like you may get it in the stock market or other forms of investment. CSOP is a derivative of a stock pool allocated to the Tyke community. You do not get voting rights or ownership of a part of the company. What you get is an instrument whose value depends on the valuation of the startup.
  • SAR (Stock Appreciation Rights): “Subscription to a CSOP may entitle the subscriber to grant of Stock Appreciation Rights (SAR) of the company. SAR entitles the grantee to receive value equivalent to appreciation in value linked to factors such revenue of the company. However, there is no issuance of equity shares involved. The value of SAR so granted can only settled by the company by payment of cash or other such incentives.”
  • Compulsorily Convertible Debentures (CCDs): These are debt instruments which, after a specified period, compulsorily convert into equity shares of the issuing company.
  • Compulsorily Convertible Preference Share (CCPS): A type of preference share that must be converted into an equity share after a predetermined date.
  • Non-Convertible Debenture (NCD): A type of loan linked bond issued by a company which cannot be converted into stock.
  • Invoice Discounting: It involves a company borrowing money against its outstanding invoices. This allows companies to get immediate cash flow based on future payments.

Reasons for such convoluted investment instruments:

In many countries, including India, regulations around crowdfunding or raising small amounts of money from a large number of people can be strict. Traditional equity crowdfunding, where individuals buy a share of a company online, remains under scrutiny and is heavily regulated. The main reason being, regulators aim to protect unsophisticated investors from potential scams or high-risk ventures. Typically a Private Limited Company cannot issue any form of securities for investment to the public and they can have a maximum of 200 share holders. In order to do so a startup needs to go public and get listed, and eventually the nature of the entity would change to Public Limited along with a wave of compliance and regulations not just from Registrar of Companies (RoC) but from RBI and SEBI as well. And going public isn’t easy, the process is extremely stringent. So in a nutshell, a Private Limited Company cannot raise funds from public. Then how is Tyke doing it? Here lies the secret,. CSOP, being a unique model, allows TYKE to navigate through these regulatory waters by offering a form of collective investment. Investing in CSOP doesn’t not make you a shareholder and technically, the security is not floated by the company, rather is a Tyke instrument. So playing on this regulatory technicalities Tyke found an ingenious way to hack the system.

Is this sustainable?

Well, this will be completely my own analysis and own opinion. Given the reason for regulatory authorities to prohibit public fund raising for any entity, is to protect the investors. If that be the intention, soon Tyke will be looked upon. Also these technicalities are few signs away from an amendment to the regulatory policies. So unless the government decides to change the policy in favor of the startups and not protecting investors, Tyke and et al is the reality of the future. But given the conservative and protective nature of the Indian financial regulatory framework, a complete opposite might also happen, which prohibits such convolutions. (Similar to Crypto). Already a couple of startups has been under the radar, and has been fined due to CCD investments. Since then Tyke started focusing on CSOPS.

Regulatory Risks & Implications

India’s startup ecosystem is booming, but the regulatory landscape is still evolving. Changes in laws can impact your investments:

  • Tax Implications: Returns from startups might be treated differently by tax laws, leading to unexpected tax bills.
  • RBI Regulations: In case of debt based instrument RBI would dictate the laws and regulations.
  • SEBI Regulations: The Securities and Exchange Board of India regularly updates its regulations. A change in norms around unlisted shares or debentures can affect your investments.
  • Due Diligence Limitations: Platforms do their best to vet startups, but there’s always information asymmetry. A regulatory crackdown on a particular sector or startup can lead to investment losses.

The perceived advantages platforms like Tyke

  1. Lure of High Returns: Successful startups grow exponentially, potentially offering significant returns.
  2. Diversification: They allow an expansion beyond traditional investments, bringing variety to portfolios.
  3. Championing Innovation: By investing, you’re essentially nurturing novel ideas and potentially transformative solutions.
  4. Transparency: Platforms, especially like Grip, prioritize building investor trust.

The potential pitfalls of startup investing:

  1. Volatility Risk: The startup world is unpredictable. Businesses can falter, leading to total investment wipeouts. For every success story, many startups don’t make it, potentially resulting in total investment loss.
  2. Liquidity Issues: Selling your stake might be challenging, given the absence of a robust resale market.
  3. Information Asymmetry: Startups may not always offer transparent insights into their workings.
  4. Valuation Dilemmas: Determining the true worth of a startup is more art than science, posing risks of overvaluation.

The Verdict

Venturing into startup investments via platforms like Tyke, or Grip presents an exhilarating, potentially rewarding journey. But, it’s fraught with uncertainties. In my opinion, be cautious about your positions. There is an inherent risk with every startup investment but in this case the platform risk has to be factored in. Yes, there is an temptation for higher returns, but my advice would be have have a minimum exposure on to it. In other words, only invest the money which you would not mind loosing.

For the Adventurous: If you’re someone with a diversified portfolio, a penchant for risk, and an appetite for high returns, these platforms can be a useful.

For the Cautious: If you prefer stable returns and can’t stomach the idea of losing your investment, it’s better to steer clear and stick to traditional avenues.

Ultimately, while the allure of backing the next big thing is undeniable, it’s paramount to be armed with knowledge, seek expert counsel, and always prioritize one’s financial well-being. Remember, while every startup dreams of being the next unicorn, the journey is riddled with challenges, and the onus is on the investor to navigate this exciting yet unpredictable landscape wisely.

In case you are interested in investing through platforms like Tyke or Grip is undoubtedly enticing, it’s essential to tread carefully:

  • Know Your Risk Appetite: Startup investments aren’t for the faint-hearted. Ensure you’re comfortable with the associated risks. Only invest the money you don’t mind loosing.
  • Do Your Homework: Research the startups, understand their business models, market potential, and competition. Also your experience and skills to evaluate startups would be the primary factor.
  • Diversify: Never put all your money into one venture. A well-diversified portfolio spreads and mitigates risks. Also never put all your investment in one platform or one genre of instrument. Diversify in all aspect.

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