Investing in Startups: The Pros and Cons
It seems that the financial world just can’t stop talking about investing in startups. Entrepreneurs are always looking for new ways to fund their business ventures and crowdfunding platforms have made it easier than ever to match new startups with potential investors. While investing in startups can be risky, there is also the possibility for investors to enjoy some serious returns on their investments making them an enticing option for those willing to navigate the risks.
When you first think about investing in a startup, it is important to consider the fact that many new businesses simply won’t last. While close to 400,000 new businesses are started each year in the US, many won’t even survive their first year. But for the startups that are successful, it can be extremely lucrative if the investment pays off.
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Now let’s take a look at the pros and cons of investing in a startup business.
Pros
For investors that aren’t scared of the risks, startups offer an opportunity to enjoy a high return on their initial investment:
1. Wide availability
There are startup investments available in a wide range of markets and industries. This is a great way to diversify your portfolio especially in areas you may not have previously considered such as emerging markets – investing in startups can mean investing in an idea that you believe is the future.
2. More investment options
The largest and most successful businesses only offer investors limited opportunities to buy shares in their company. With a startup investment, you’re offered different options for investing your money. For instance, you can start by directly purchasing a large stake in the company or choose an investment vehicle like a convertible note which can be exchanged for stocks at a later date.
3. Opportunity for growth
All it takes is a good idea to be successful for a startup to grow. While the risk is high, startups offer the potential to see huge returns on your investment in a short period of time. Although you need to be smart about where you put your money, consider investing in a startup like being part of the development of our future!
Cons
Despite all their benefits, startups are still considered high-risk investments. Make sure you only invest the portion of your portfolio that you’re willing to lose if the startup you choose goes belly up:
1. Huge loss potential
For many small companies, it can be next to impossible to predict if they will fail or not. Especially for startups, much of their failure can be attributed to the individual actions of the entrepreneur, while others fail for reasons completely out of the company’s control. Make sure you protect yourself by diversifying your portfolio with some safer investments.
2. Liquidity Risk
If you invest in a startup, it’s likely your money will be tied up for quite some time. Startups investments are between privately held companies which means you won’t be able to trade your investments on the public stock exchange. This makes it harder to find potential buyers. To mitigate the risks, only invest money you won’t need to cash out within a certain timeframe.
3. Fraud risks
If the startup you invest in commits any fraud or misleads any of their investors, your entire investment may be at risk. Make sure that you properly review all the companies’ disclosures before investing as well as looking into the entrepreneurs themselves. Having all your background information on the team will help you judge whether or not to put the cash in.
Taking these pieces of advice into consideration, you are now ready to launch yourself into the world of startup investing. Again, be smart with your money and make sure you have some safer investments as well to balance out the high-risk involved with start-up businesses. Good luck!
