While investing in a start-up may be risky, it can result in high returns – although losing your investment is also entirely possible. In general, three or four out of every dozen start-ups fail and three or four return their original investment, while just one or two succeed. However, early investors in the latter businesses, should these enterprises go public, can see high returns. As well as these possible returns, there are many other benefits to investing in a start-up.
New Ideas and Technologies
First, those investing in a start-up may gain access to new ideas and technologies, due to the fact that these new businesses are often at the forefront of innovation and potentially working on cutting-edge projects.
The Opportunity to Gain Experience
For budding entrepreneurs just starting out, investing in a young business offers the perfect opportunity to gain insight into a new market or field. Becoming an investor in a start-up is a highly unique experience, as you immediately become part of an up-and-coming company that has the potential to become successful in the future.
Furthermore, by engaging in conversation with the company’s founders, investors can learn valuable lessons and gain specialist knowledge that can be applied to future ventures. They will also have the
opportunity to observe how the company’s founders manage the highs and lows of entrepreneurship, in turn providing a road map for successful growth.
Smaller Amount of Investment Required
It’s often possible to invest smaller amounts of money in a start-up than would be possible in an established company. As serial start-up investors like Volker Hartzsch know, this is due to the fact that start-ups tend to have a smaller market capitalisation, as they are at an early stage in their development cycle.
Portfolio Diversifications
Investing in a start-up can also be an effective way for investors to diversify their portfolios. This is an important way of spreading risk; plus, unlike bonds and stocks, start-ups are less vulnerable to market fluctuations, further helping to mitigate financial risks for investors.
Dynamic New Markets
As start-ups are often located in rapidly growing and dynamic markets, they are likely to have access to a large pool of potential customers, highly skilled workers and many prospective investors. Facebook, Google and Amazon are all examples of start-ups that began life in these exciting environments.
Potential for Buy-Out
Start-up concerns may also be of interest to large companies, and a buyout can be great news for investors. These large companies may buyout a start-up if they identify it as a future competitor – or because they see the potential to leverage the technology the start-up is developing in the future.
The Importance of Due Diligence
Anyone interested in investing in a start-up should conduct proper due diligence to evaluate the new company’s business plan, model for generating profits and potential for future growth. Significant barriers to entry and existing strong competitors need to be assessed, and when it comes to completely new ideas, regulatory, legal and compliance issues should also be considered.
