Cashing In: Demonetisation, And The Shifting Paradigms in The Investment Industry

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Even after more than a month since it was rolled out, the Government of India's move to demonetise high-value paper currency continues to make headlines on a daily basis. But even as the move's strategic advantages, long-term benefits, and repercussions continue to be discussed and dissected, the Indian start-up community has held its breath. Unsure of what the changing dynamics of the country's economy mean, the focus – at the moment – is on how this will affect the overall entrepreneurial ecosystem, especially the investment landscape.

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This feeling of caution is well-merited. After a period of hyper-growth and big ticket funding sprees, investments into Indian start-ups have recently shown signs of achieving normalisation. This can be seen in the sector's shift towards seed and early-stage investments into promising ventures which are built on the foundation of sustainable growth, profitability, and sound unit economics;the first three quarters this year have already seen 571 early stage investments, compared to 575 such deals that were announced in all of 2015.The government's drastic announcement at such a critical point of growth for the Indian start-up industry has been worrying many entrepreneurs and industry experts, who are afraid that the development might put a spanner in the works.

Amore in-depth analysis of the possible market repercussions of the move will tell quite anotherstory.Due to the current market turbulence,high net-worth individuals (HNIs) across the country are wary of putting their money into real estate, and housing loans. The impeding crackdown on real estate and other high-value assets add to the atmosphere of uncertainty surrounding thesetraditional investment portfolios. Long-term debt mutual fund schemes, such as gilt schemes, are also not advisable for the risk associated with them. In such a situation, what avenues do the HNIs look to maximise their investments? Why, start-ups, of course!

With cash suddenly out of fashion, leading fintech players, such as Paytm, MobiKwik, and FreeCharge, have reported exponential growths in their transactional volumes. Similar growth is being expected for e-commerce ventures and other tech-based start-ups. This massive growth opportunity for tech-based entrepreneurial businesses in the country is why the investorcommunity as well as HNIs are increasingly looking at a viable channel to invest and multiply their risk capitals.

Recent amendments to the regulations governing the Alternate Investment Funds by the Securities and Exchange Board of India (SEBI) have also provided more incentives for HNIs and investors to take up the role of angels to early-stage start-ups. The minimum investment amount for early stageinvestments has been halved from the erstwhile INR 50 lakh to INR 25, allowing angels the flexibility to maximise their fund utilisation and minimise capital risk by facilitating investments into more ventures across the board.

Reducing the minimum lock-in period from three years to one year will also be music to the ears of Indian investors, who are always on the lookout to maximise their gains and investment frequency through faster exits. By allowing angel funds to be invested into start-ups incorporated within 5 years, SEBI has given investors the option of identifying and adding more mature ventures to their portfolios. This enables angels to select ventures that offer the right balance betweengrowth potential and market track record, thereby minimising their risk.

While the long-term effects of the demonetisation drive on the overall entrepreneurial ecosystem remain to be seen, the early signs have been extremely promising for both start-ups and investors, especially in the light of other recent developments aimed at revitalising the sector. Demonetisation has definitely given the country's investors, particularly those associated with the angel and seed stage investments, much to cheer about!