The world of investments is generally ruled by a very simple fact: the riskier the investment, the greater the potential rewards. And in the last ten years, nothing quite stirred the blood of investors and venture capitalists as much as the global and ubiquitous boom of startups.
Startup investments – against (most) odds
Investing in startups is an undertaking on very slippery ground: as Fortune magazine states, 9 out of ten startups fail. But what’s with the remaining 10% – how many future cash cows are hiding in that rather puny percentage? Just think of certain global players, now worth billions of dollars, that started out in the proverbial garage (or, you know, an actual garage). Let us just mention Instagram, Uber, Google, Apple…The list could go on. Or to put things into a numerical perspective: if you, say, invested 10.000 USD in Microsoft when it was founded, today you would have a whopping 3.5 million USD sitting in your bank account just from that investment alone!
The roaring startup trend resulted in the phenomenon of angel investors, or simply “angels”: well-off individuals that provide their capital for a business startup, and in return get ownership equity usually in the form of stock shares. Some angels opt for investing online on platforms for equity crowdfunding or gather in the so-called angel networks in order to amass their investment capital. Similar in scope to angel investors, venture capitalists form professional groups for startup funding. However, they do so on a much higher scale and usually seek a greater deal of management control in the company.
The how and the why
Even if you’re not rolling in money, you still have the power to indirectly invest in small businesses by first investing in private equity funds that specialize in venture capital funding. In addition, attending networking events should be very high on your priority list if you want to dabble in this kind of investing. If you want to meet the masterminds behind striving young companies that could make it big one day, then these affairs are the place to be. It’s definitely worth the trouble because if all goes well, your investment can be paid off tenfold or even hundredfold. But, how do you filter through the oodles of startups on the market looking for funding? In other words, how do you figure out the right opportunity to obtain a return on your investment, snatch it, and strike gold?
While there’s clearly no exact formula or straightforward answer to this question (that’s kind of the beauty of it, isn’t it?), there are many strong arguments for why you should invest in startups. After all, a common trait in many startups is their trying to revolutionize the way the industry, the community, and the world works. Some even succeed. Out-of-the-box thinking, innovations, fresh new ideas and approaches are what makes some of most successful startups on the current market so brilliant and so necessary. It is only a matter of time before a great idea, fueled by hard work, passion and dedication falls on fertile financial ground.
Here are some pointers you need to keep in mind before you plunk down a hefty sum of your investment money:
- Conduct due diligence
Before any financial commitments from your side, it’s crucial you investigate, analyse and audit the company you want to fund.
- Meet the people behind the company
Make sure you’re providing funds only to trustworthy, honest and hardworking professionals. Also, keep in mind your vision has to be if not the same, then at least compatible with theirs.
- Study the market and the competition
Understanding the current industry tidings in question (including its main competitors) and how it might affect the company you’re looking to fund, are key to bringing an informed, financially prudent decision about how much money (or if any at all) to invest.
- Inspect the legal framework
Take the time to research the national and regional laws of the industry, with special regard to the possible legal challenges that might obstruct an otherwise sound business concept. “Before you invest your life savings, or bet your career on this startup, you need to know how much of a barrier to entry the brand and patents are projected to be.”, warns Martin Zwilling for Forbes.
Investing in startups is also important because it helps you to:
- Diversify your portfolio
Never put all of your eggs in one basket – especially when it comes to investing your money. A diversified portfolio is a more efficient portfolio, and the numbers are here to prove it. According to a Sharespost whitepaper, an investor who allocated 5% to the private growth companies basket, and the remainder to the benchmarked portfolios would have experienced 12% higher returns.
- Support ideas you believe in
Your investment can bring you more than just financial reward. That’s because investing in a new and exhilarating business idea gives you the opportunity to give leverage to ideas you truly believe in, and potentially even drive a force that is going to change the world for the better.
Note: if you’re a (future) startup owner and are looking for ways to finance your business idea, check our recent article on how to find funding for your startup.