Investing in startup firms was something that was reserved for the investors having a strong venture capital. However, times have changed for startup businesses and investors. Two years ago, the United States Securities and Exchange Commission (SEC) adopted rules allowing companies to raise money through crowdfunding from anybody interested in investing. Since then, more than 1,000 businesses have filed with the SEC to raise money on online platforms and $137 million have been committed to these businesses, according to the Crowdfund Capital Advisors, a leading crowdfund investing firm. Not just tech firms, but startups have also been funded in 80 different industries, ranging from restaurants to salons and logistics companies.
Presently, there are more than a million startups that seem to appear and die everyday because the competition is severe and conditions are undefined. In addition, the increasing demands of consumers compel them to search for funding to be able to grow and become successful. Of course, not all of the startups need investments. However, majority of startups really do, and investing in such startups is a big part of risk and uncertainty.
Investors, nowadays have gained access to a wider range of investment opportunities. Currently, more investors are investing their money in startups with a hope of promising future, which has led to an array of paybacks for both the business owners as well as the investors. With the advantage of achieving a remarkable return on investments, the following are the key benefits of investing in startups.
- Extraordinary Returns at Earlier Stage
Many startups typically require quite affordable sums of money to start because an opportunity to invest in such startups at an early stage can result in great profits in case of future success. Compared to funding big firms with hundreds of other investors, being one of the few shareholders in a startup for the same money is more beneficial. Moreover, the most vital reason to invest in startups is the chance for a very high return.
Investment opportunities that involve high risks can deliver a higher return on investments. However, putting a large percentage of savings in early-stage investments is not advisable. Allocating 5% of the overall portfolio into investments can increase returns while reducing the volatility. Because at early-stage, private companies generally have a low correlation with traditional asset classes, such as stocks and bonds. In fact, the investors who are ready to take great risks at the earlier stages expect correspondingly great returns. In order to limit excessive portfolio risk and still generate high returns, using a variety of venture capital strategies is more helpful.
Another reason to invest in startups is that it can pay off a three-figure percentage profit with the exit, i.e. sale of the company, initial public offering (IPO), or an acquisition. The example of a snacks seller startup, erdbär GmbH explains that the investors, who invested in it, got a whopping 300% return on their investments. Similarly, the investments of the first investors in the startup firm, Doxter and Foodist were also very close to the three-digit return on investment.
Opportunity to Become an Integral Part of the Growing Startup
Experienced investors can have various companies on their record, including big players and small startups. Such an approach will help balance the potential risks and benefits from all deals. Investors of startups and smaller firms can seize an opportunity to take on more active roles in the advisory and management panels. Furthermore, getting in small startups gives a higher proportion of voting shares, and by the same token influence over the organization’s decisions. Therefore, it is a great opportunity to influence and impact the future direction and prosperity of the startup along with an authority to alter company’s upcoming and future decisions.,. In addition, the investor can find out the firm’s future plans, and how he or she can contribute to getting more returns. By researching the technologies and future-oriented industries with growth potential, investors can move the startup’s direction towards achieving further growth.
Startups that focus on an addressable market, which can be disrupted with profitable results, have greater chances of securing investment. Recognizing such startups with higher future growth isn’t always easy. The case of Amazon proves that even great investors failed to measure the potential and future growth of this highly acclaimed e-commerce giant. Today, an initial US$5,000 stake in Amazon has now become a whopping$2.4 million.
Higher the Growth, Higher will be the Profit
Not every startup can make the profits like Facebook, Uber, Twitter, or other successful outliers. However, this does not mean that investing in a successful startup is winning the lottery either. Owing to this, finding and selecting the right startup to invest in takes a little more research and efforts, but with a little practice, many investors can become good at identifying the growing startups. One can search for a startup that is making good revenues and more clients with some unique technologies or solutions. Furthermore, one can also go through the social network pages of the startup founders to see their competencies, business models as well as their future plans for the companies.
In 2012, Thomson Reuters launched the Thomson Reuters Venture Capital Research Index, which replicates the performance of the venture capital industry. This index shows that venture capital has reimbursed 19.7% of capital. On the other hand, just 7.5% and 5.9% reimbursements were for public equities and bonds respectively. Similarly, in the same year, Professor Robert Wiltbank released findings from the largest data set of individual angel investments that have ever been collected and found that U.S. angel investors returned on an average of 2.6 times more returns on their invested money. Assuming that the average time to exit an angel investment is five years, one can get 21.1% returns every year, which is slightly higher than overall venture returns. Moreover, there are few asset classes that offer the homerun potential of venture investments. Peter Thiel’s initial investment in Facebook increased in value by over 2,300 times prior to the IPO.
There is no denying that innovative startups are the hope of the future. Investors find contentment in helping these companies because most of these ventures are inclined towards introducing ground-breaking ideas that propel social change. Apart from being a part of something revolutionary, funding high-potential startups also create more job opportunities, which will lead to a satisfied workforce and a healthier economy because nation’s economy plays an essential role in building the wealth of the people of that country. With the right tools, right approach, and focused research, today’s investors have a big opportunity to amplify their wealth by investing in startups.