If you had invested only $1,000 in Amazon, Microsoft, Apple, or Google at the time of their initial public offering (IPO), you would be sitting on a gold mine today. Obviously, these firms’ shares have multiplied significantly since then. Imagine if you had invested before to the initial public offering! How may your investment look today?
Each successful business was founded on an original concept. The 12,000% return Sequoia Capital earned on its investment in WhatsApp may inspire you to invest in the early stages of the next great thing. Remember that turning companies into success stories takes time, money, and risk.
The investor’s dream
An investor’s ambition is to discover the ideal startup. Often requiring only a little initial investment, a successful startup might expand rapidly into a very profitable corporation, allowing early investors to reap substantial returns.
However, not every startup will be successful. About 90% of new businesses fail. 70% of new businesses fail between years two and five.
However, you should not let this deter you. It is well-known that investing in startups is very dangerous and that you should never spend money you cannot afford to lose. The benefits might be extraordinarily substantial, but the loses can be catastrophic.
Before deciding to invest in a startup, you must be well-prepared, have relevant expertise, and most likely confer with specialists. Due to these factors, it is not unexpected that the majority of persons who invest in startups are successful entrepreneurs who have traversed the path and are familiar with its advantages and disadvantages. Thus, they attain the status of so-called serial entrepreneurs.
How can you invest in startups?
Want to learn how to invest in startups? This guide from Investor Daily details the rewards, dangers, and best practices for becoming a successful startup investor.
Crowdfunding
You may add startups to your investing portfolio using online investment platforms. On these platforms, companies at all phases of development often offer early investors shares, convertible notes, or debt.
Despite the fact that some prosperous firms opt to pay dividends to their shareholders, the majority of investors on these platforms are counting on the company being purchased or coming public at a much greater price.
Wefunder, SeedInvest, StartEngine, and Fundable, among others, are the most prominent startup crowdfunding platforms for locating the next great opportunity.
Venture capital funds (VCs)
A venture capital fund is a form of investment fund that invests in early-stage, high-return, high-risk startup enterprises. The fund is administered by a venture capital firm, and its investors are often institutions or high net worth individuals.
Typically, venture capital firms invest in pre-IPO companies they believe will increase in value, become public, or be acquired by another business.
LocalGlobe, Accel, Index Ventures, Seedcamp, and HV Capital, among others, are among the most renowned VC firms in the EMEA area. The major venture capital companies in the United States are Intel Capital, Sequoia Capital, Tiger Global Management, Kleiner Perkins, and others.
An initial public offering (IPO)
This is when a private corporation allows the public to purchase shares in a business for the first time in exchange for a portion of future profits. IPOs may be incredibly profitable methods to launch a new firm, with Google and Facebook owners reaping millions of dollars in profits on their investment. For instance, If you had invested $1,000 in Google’s IPO in 2004, you would now have more than $30,000 in earnings, a gain of more than 3,000%.
Bonds
These instruments provide the opportunity to invest in a business with the promise of receiving the principal plus interest in the future. Bonds are time-limited, so once you’ve received your portion of the company’s earnings, you would need to purchase further bonds to continue to participate in the business’s growth.
Why should you invest in startups?
Several prominent firm success stories have demonstrated that investing in a startup is one of the few excellent strategies to get significant profits. What inspires investors to invest in startups is as follows:
Potential gains
With proper planning, startup investments may be extremely lucrative. In the ever-evolving knowledge-based economy, pay attention to businesses that give answers, provide value, and create new trends.
Portfolio diversification
Startups are a class of assets that enables the exploration of alternative investment channels. Investments are hazardous, and a diversified portfolio reduces the likelihood of incurring a significant loss during a market decline.
Creation of jobs
By investing in a startup, you help the economy go in the right direction by assisting a firm in getting off the ground. You will have helped to the development of jobs for non-investors if it succeeds.
Personal relationships
Maybe your brother or your neighbor is launching a fantastic new product. It appears to be an interesting concept, and you wish to assist a friend or relative in financing their endeavor. Numerous individuals invest in startups since they are part of a network and are supporting a familiar idea.
A variety of options
There are startups in almost every market and sector. Thus, you may diversify your assets across markets and market capitalization sizes, including emerging markets.
Acquisition possibility
Numerous startups are acquired by major firms who view them as prospective competitors or wish to utilize the technology developed by the company. If the startup in which you invest sells for a profit, you will receive substantial profits.
Why shouldn’t you invest in startups?
Despite their enormous potential, startups are considered high-risk ventures due to their low success rate. Consider these drawbacks before investing in a company.
High risk
You might invest in a firm that fails, regardless of how lucrative it may be. Startup investments are high-risk, and your return on investment is contingent on the success of the new enterprise.
Wrong valuations
Even when the firm has not yet acquired momentum, the majority of startups provide values more in line with Silicon Valley. This makes it more difficult for you to invest in the startup of your choosing.
Illiquidity
If you purchased a stock today and then changed your mind tomorrow, you could easily sell it. In contrast, startups are very illiquid. When investing in a startup, you should anticipate that your funds will be committed for a minimum of three to five years, if not longer. Although you may have the option to sell through secondary markets, it is not guaranteed, and it will likely take years for your investment to mature and bear fruit.
How to recognize if the startup is a good investment?
How you approach investing in startups will depend on your own finances. Before putting your money on the line, experts advise performing extensive study. Before investing in a company, you must be able to answer the following questions:
What is your knowledge about the startup?
Is it a subject, industry, or product with which you are familiar? Experts advocates only investing in projects that you fully comprehend.
Is the team enthusiastic about their concept?
Even a brilliant concept might fail if the team isn’t passionate about implementing it. There have been a lot of organizations with significant growth potential that got complacent when new competitors entered the market. Whether talking with clients, recruiting a staff, or building a plan, a successful entrepreneur must have enthusiasm.
Does the startup possess domain expertise?
The startup should be intimately familiar with the industry in which it operates. Numerous first-time entrepreneurs have spotted a successful company model and sought to duplicate it in a new location. And it failed because the founder was too busy learning the principles of the business while rivals were able to establish themselves and begin operations more quickly.
What is the market’s size?
Startups must have a substantial and expanding market. Sometimes, companies target a niche and create a product that is so specialized that, even if they outcompete their competitors, they cannot grow into a major firm. At that point, it becomes nearly hard to educate clients and expand your market share, no matter what you do.
