Why Invest In a Startup?
The reasons startups are actually worth the risk and what you can do to increase your chances of seeing returns.
By Gain Investors’ Staff
There are many small reasons why you should not invest in startups, but a few key, very valid, and important reasons why you should. Surely, you have heard someone say “it’s too risky”, “you will lose all of your money”, or “your returns will be negative.” If that were completely true, why do investments in startups bring in higher returns than some others? Or why, then, do investors actually allocate their funds in startups? The answers are really quite simple.
Reason #1: You can earn great returns on your investment.
Yes, you read that correctly. Returns can be handsome for startup investments. But, 3 out of 4 startups fail, how will I actually make returns? There is still that 25% chance that you will make returns, handsome ones at that. The reality is, if you perform due diligence you will increase your chances at finding that 25%.
As for numbers: 2012, Reuters numbers presented returns of 19.7% in venture capital since 1996. You can compare these numbers to the 7.5% and 5.9% for public equities and bonds, respectively. Also, keep in mind other databases and research, such as Witbank’s, that angel investments brought in 2.6 times their investment. That makes for a 21.1% annualized return!
Still not buying the numbers? Look at returns at Facebook, Uber, Microsoft, etc. Yes, those are the golden startups that hit big, but the numbers are quite impressive. Just make sure to invest what you can stand to lose, say 5% of your income- which is the maximum under current law if you earn less than $100,000 a year. That way, you gamble (hopefully, intelligently) only what you find disposable. But what if you find the next big thing? Still not convinced, I suppose. What about my portfolio?
Reason #2 Diversify, diversify, and diversify
You can lower your volatility. You diversify your assets and investments. Want numbers? Sure. For example, Yale University allocated 19% of its’ portfolio to venture capital in 2018. They have invested for years in those sectors. They also made a $2.7 million investment in LinkedIn before they went public. Their returns? On average, 24.6% annualized for the last twenty years. Oh yeah, and they produced $84.4 million in gains from LinkedIn! Not enough? Keep reading.
Reason #3 You invest in the future.
The people behind the startup are usually aspiring to solve a problem, or at least the ones worth looking are. The startup looks to resolve a problem that is tied in with the needs of the market, an unmet need. Think new technology, products or services that improve the quality of life, etc. As an investor, you become a part of the solution. The intangible benefits are immense and real. You become a part of a project that aids society in some way. You go beyond self-interest.You will most likely spend many hours performing tasks that will not make you money; helping someone fill out necessary paperwork, offer advice, maybe aid in helping women led startups, and introduce people to the right groups. But, you will be part of something, a family-type organization. You will form meaningful relationships with people who want to do good. Basically, just do good.