Startup investing can be exciting but equally uncertain. Investors should carefully invest in startups that pay off well. But it’s not that easy. The harsh reality is only 10% of startups successfully move to the IPO stage, which is the culmination point of startup investing.
Mostly, angel investors don’t know whether they’ll get windfall profits or sustain losses through startup investing.
For investors, startup investing offers an excellent way to diversify their investment portfolio. However, investors shouldn’t invest all their funds in a single startup. They need to diversify their investment and should try to invest their funds in multiple startups.
With diversification, the probability of getting more profits and returns also gets multiplied. You need to be a bit cautious before writing the check as you never know what the firm will do with the fund. Due diligence is the need of the hour.
Investors must carefully go through all the relevant documents and financial information before deciding to invest in any particular firm. In this blog, we’ll take a look at all possible risks and rewards of startup investing and what should you know about it.
Here are the top rewards and benefits of startup investing
Maximize Your Returns
Startup investing can be a profitable venture for investors if they make the right choice. Most startup firms come with low valuations, which means investors can easily get a significant share in the startup firm at a low cost. However, you can’t ignore the possibility of financial losses when the startup fails. It may lead your entire investment to go to waste.
You should select a startup, which has an innovative business idea to work on. For example, when Facebook was launched, it came out with a compelling idea to provide a social networking platform that connects people.
Peter Thiel was one of the early investors who invested $500,000 in it. Eight years later, when he sold his shares, he earned around $1 billion. He won’t have earned such a huge amount of money had he not invested the money in a startup.
Connect with Like-minded People
Startup investing provides an exciting opportunity for startup investors to build new connections and meet various like-minded people in the process. Through networking, investors can enhance their business network and come across various profitable investment opportunities to invest in the future.
Positive Impact on Employment
Startup investing is an excellent way to promote employment in the country. Making an investment in startups is a great way to generate employment and raise people’s standard of living. Thus, through startup investing, investors can also work for the betterment of society.
The mushrooming of startups across the country will lead to a rise in various employment opportunities, too.
Support Innovative Ideas
If you’re investing in a startup that is working on an innovative idea, you’re directly supporting and encouraging the firm to try building an innovative product or solution.
By investing in startups, investors can easily fund business models that can disrupt the market and offer innovative solutions to customers’ pain points.
However, just like with every other venture, startup investing is not fully safe. Investors who invest in startups need to be ready for their potential risks and uncertainties, too.
Here are potential risks attached to startup investing that investors shouldn’t ignore.
Potential Risk of No ROI
All investors should know that their investment might yield no returns if the startup fails. It happens most of the time.
As a shareholder, you should be ready to bear the loss. There is no guarantee that investing in startups will make you a millionaire or billionaire. It may or may not happen. The success of a startup depends upon many factors, including the startup idea, implementation of the plan, the team you have, customer preference, and the availability of the funds.
Through liquidity, you can easily convert a financial asset to cash. Investors should know that some assets are more liquid. It’s essential to understand that startup investing is a long-term commitment. You can not invest and withdraw your investment as and when you wish to. It doesn’t work like that. Buying equity in a privately-held startup is an illiquid investment.
In such a case, you won’t get access to the marketplace to sell your shares and minimize the loss. Besides, you should also know that it’s impossible to make an exit from a startup after making an investment unless it goes through the IPO stages. It acts as a major deterrence, which compels many investors to back off.
Many times, things don’t go as per plan. There can be hurdles at each step. Even a successful startup that looks successful in the beginning, can find itself in a difficult situation. Predicting a startup’s future is difficult. As customers’ preferences keep on changing, the startup starts facing one challenge after another.
There’s no guarantee that even after following the market trends and creating products that customers love, a startup may still suffer. Shareholders should be prepared for any eventualities.
Dilution of Control
The proportion of your investment in a startup will gradually go down as more and more investors start investing their funds in the startup. As an early investor, you may lose control over the firm as more and more new investors join in. Your investment value will drop and may lead to dilution of control, too.
Investing in a startup is a crucial decision. You should take your time and then zero in on a firm that looks best to you. But the foundation of a sound investment decision is the accuracy of the plan, implementation, and due diligence with access to the updated business information along with key financial details of the firm. If you’re a startup and looking forward to connecting with the visionary startups for success, contact StartUp Steroid now.
I’m the co-founder of Startup Steroid. Being a founder/ co-founder (of multiple businesses) and investor (in multiple startups) myself, I experienced the challenges that an investor and a founder face. So, we built a network of 2,000+ Investors, Startup Founders, and Ecosystem Partners since its foundation and still growing. We empower innovative ideas by providing direct access to smart money and meaningful networks.
I am also the CEO of SPV Hub.