in startups can be one of the most exciting and lucrative ways to make money, and it’s also become a lot more accessible.
A field that was once reserved for investors with deep pockets has opened up to retail investors who can now get in on breakthrough companies that have the potential to offer big returns.But along with that mise of double- or triple-digit multiples comes a high level of risk.The majority of startups fail, and investors who backed them stand to lose everything.This article will break down the reasons in startups can pay off, what to watch out for, and how to get started responsibly.Table of ContentsThe Appeal of Startup Potential Returns and Growth OpportunitiesDiversification Beyond Traditional AssetsSee All 7 ItemsThe Appeal of Startup in startups is exciting.
As an early backer, you have the potential to get in on a that’s new, innovative, solves a blem, or is just flat-out revolutionary.
Think of Uber or AirBnB, which completely disrupted the car service and lodging industries. Each startup created new with thousands of newly created drivers and hosts.
Suddenly millions of consumers with disposable income had more car and lodging options than ever before, and they were often cheaper, faster, and more flexible than what already existed.Common traits that made Uber and AirBnB successful included leveraging nology to bring solutions (expanded car service and lodging options that are affordable and easy to order) to blems (a limited and expensive stock of car service and lodging options), and thereby disrupting two well established industries.Early-stage made multi-millionaires out of those who made bets on startups Uber and AirBnB, but only accredited investors with more money at their disposal could gain access.Nowadays, however, such investment opportunities are also available to non-accredited investors, thanks to equity crowdfunding, Regulation A+ stock offerings, and other means that are made possible by regulatory reforms enacted over the last decade or so.Potential Returns and Growth OpportunitiesThere are many benefits of in startups, and the potential for exponential returns is the No.1 attraction.
Traditional investments in s of publicly traded companies typically grow more gradually, with stock prices rising and declining along the way, and their overall returns are more modest.Investments in privately held startups, on the other hand, can reap returns many times over the original investment.
Indeed, an investment of just a few thousand dollars can become millions if placed with the right .
According to Brian Nichols, founder of angel fund community Angel Squad, a $5,000 seed investment in Uber in 2010 was worth almost $25 million in 2019 when the company made its initial public offering.
A $5,000 seed investment into AirBnB in 2009 would have become $35 million at the company’s 2020 IPO.Those investments grew exponentially because those startups grew exponentially and quickly, highlighting some of the common characteristics that startups : They address and are accessible to a large market, they can be scaled rapidly, and they leverage nology in a disruptive way.That means that breakthrough startups aren’t only found among service sector es AirBnB and Uber, but in scores of other sectors including artificial intelligence, communications, computer hardware and software, finance, transportation, and medical and health sciences, to name a few.
Diversification Beyond Traditional AssetsThe potential for outsized startup investment returns is just one factor that makes this asset claass well worth considering as part of any non-accredited and accredited investor’s portfolio.
They can also be a great way to diversify.
startup investment returnsMost retail investors tilt heavily toward publicly traded securities such as stocks, bonds, mutual funds and exchange-traded funds (ETFs), all of which are tied to the performance of the public .
in startups, on the other hand, is not linked to stock market performance. Instead, startup investments are linked to the growth and success, or decline and failure, of individual startup companies.
When public fall, they’re not going to take startups down with them, which can help offset potential portfolio losses.Keep in mind, however, that startup payoffs, in the form of an exit event such as an IPO or acquisition, can take a decade or more to be realized, tying up your money in the company in the meantime.Risks to Keep in MindLimited liquidity and a long timeframe before a startup investment pays off are just a couple of the downsides.
One of the biggest risks of startup is failure. In fact, most startups fail.
It’s a harsh reality that shouldn’t be surprising, given that untested companies face a slew of possible pitfalls such as inexperienced management teams, overestimated sizes of target audience, overlooked competitors, and ducts that just aren’t as as startup founders expected them to be.That’s why due diligence is crucial.
Investors with the opportunity to put money into a startup should first rigorously vet the .
This includes understanding the duct or service that’s being offered, whether or not there’s a demand or a market for it, whether the model is workable and scalable, and whether the management team has the competence to help the achieve its goals.How to Start in StartupsAnyone who wants to begin in startups first needs to determine whether they’re accredited or non-accredited.
Each type of investor has paths they can take, but accredited investors have more opportunities.To qualify as an accredited investor, an individual must either have a minimum annual salary of at least $200,000, or assets of more than $1 million, not including the individual’s primary residency.
To qualify as an individual with a spouse, the minimum annual salary required is $300,000, or assets of at least $1 million, not including the couple’s primary residency.Accredited investors can invest in startups as angel investors and venture capitalists, viding seed capital either directly to a company or as part of an angel network.Non-accredited investors can also put on their venture capitalist hats by in startups through so-called Regulation A+ stock offerings, whereby offer unregistered stock with less stringent reporting and disclosure requirements.
Another option is equity crowdfunding. On some platforms, non-accredited investors can start in startups with as little as $100 to $500.
Does Startup Belong in Your Portfolio?While there is potential for great returns, there are also substantial risks of startup that could lead to financial ruin.
Potential investors must thoroughly re the startups they’re considering while viewing them as a part of a balanced portfolio and not a replacement for core investments.Frequently Asked QuestionsQWhat are the benefits of in startups?
AThe benefits of in startups include the potential of picking a winner with outsized returns, the excitement of backing a potentially pioneering , and portfolio diversification. QHow risky is startup ?
A in startups is very risky, because relatively little is known startup companies compared to their publicly traded counterparts, and many of them are unven.
Also, angel investments are not liquid, because once an investment is made, the money stays with the company until an exit event an IPO or acquisition happen. QCan beginners invest in startups?
ANon-accredited investors can invest in startups through equity crowdfunding platforms and Regulation A+ stock offerings.