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10 Reasons Why Investing in Startups is Not a Bad Idea

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Many people wish to start their own businesses while others prefer to invest their money in other people’s companies. The latter group opts for already established businesses because nine out of ten startups fail. Still, millions of startups have seen their 5th, 10th, or 25th birthdays.

Choosing a company to invest in is an easier task than starting your own from scratch. Actually, investing in a new startup prevents you from taking some risks and helps you to earn a decent income.

While investing in startups was preserved for the ultra-wealthy investors or firms, today, some platforms allow individuals to invest as low as $10 in upcoming startups. Therefore investors have wide access to many interesting startups while entrepreneurs can now raise early-stage capital easily.

This post will review 10 reasons why investing in startups is not a bad idea.

A smart opportunity

A startup founder carefully studies an industry to identify an addressable market and immediately takes advantage of that opportunity hence the lucrative results. An investor, on the other hand, looks for small new businesses looking for funding but with promising growth opportunities.

An excellent example is what happened to Amazon. Warren Buffet repeatedly declined an opportunity to invest in the online retailer because most people didn’t understand its business model. However, a $5,000 stake in this company during its first listing in 1997 ended up being $2.4m in 2017. This is a killer opportunity that Warren Buffet regrets to date for not taking action.

Another startup that some investors wrote off was Spotify, a global on-demand music streaming service. When Creandum invested $4.5M and got a 6% stake in that company, some entrepreneurs thought the music industry had meager returns or a risky venture. However, the venture capitalist firm exited the company with $370M.

Therefore, shrewd angel investors have a fear of missing out on good opportunities, and so they usually spot a winning market prospect that others overlook or dismiss but then walk away with outsized returns on investment when exiting the investment.

Earns You Recognition

People are keen to know who the early investor of a particular giant company was, how much their investment was and what they earned when they successfully exited the company. This information helps them gain some publicity as well as get recognized in the market. You will never miss potential deals if you’re known for investing in startups, and the firm you are funding will have a big role in your own success.

An Alluring Management Team

Angel investors look for companies with a management team with impeccable qualities and abilities. They are interested in the chemistry among the management team and between them and investors. A team with the right skills, relevant experience, in-depth understanding of its target market and sector, adjusting approaches, and learning from their mistakes can easily attract investors.

Also, integrity is an essential factor aside from management functions. So investors are ready to put their money in startups with trustworthy founders and management teams because they need credible information before investing in them.

Management Team

Scalable Business

Sophisticated investors look for signs of minor incremental costs and major sales growth. Scalability is shown by the number of customers ready to pay the full price of the startup’s product or service. Since most of the elements in a startup are speculative, investors will only finance a business after assessing its business plan to see its scalability potential. Such an assessment helps investors to pick the best startup, thus high returns on investments.

Sold Business Model

A startup should have a clear strategy of actualizing its business model because this what investors are interested in. They want to invest in a firm with a realistic, workable approach to attracting and converting customers needed for growth. The majority of startups can pitch to angel investors and demonstrate to them how they plan to grow their business, which has attracted huge financing at an early stage.

Portfolio diversification

New startups are less susceptible to market fluctuation than already established firms; thus, investing in more than one startup helps investors mitigate the risks for their wealth.

Further, selecting startups in different sectors minimizes the exposure when a specific industry collapses. Thus, investing at an early stage of a startup helps investors exit the company with huge returns compared to those who join later. This was demonstrated in the modern-day tech giants such as Apple, Facebook, Google, and more.

Employment creation

As stated above, startups require money to grow and capture the target market. Investing in new businesses helps them to create more jobs. The increased competition is contributing to a higher unemployment percentage; thus, investing in these businesses grows your wealth and indirectly creates employment.

A Foundation to a Better Future

The number of tech startups has been growing tremendously. Thus putting your money in technology startups helps to bring some innovation.

Others that work on education, infrastructure, healthcare, sustainability, and green technology aim to make a better future making it a noble idea to invest in such companies.

Creates a Wider Personal Connection

Investing in a new startup helps an investor meet with other entrepreneurs with similar interests and brilliant business ideas. These individuals can help you to run your company in the future as business partners, investors, consultants, mentors, or employees.

Therefore diversifying your portfolio not only spreads the risk but it helps you meet other like-minded investors.

Potential Payback

When investors fund a startup, they take on board its loss of capital, dilution of shares, and other risks because they want to get returns. In some instances, an investor can get a 25% return on their investment due to the failure of some startups. However, investors can earn huge returns from a single company out of the 100 investments they have made on others.

Therefore, it’s important to carefully study the market and diversify in order to increase the potential of exiting a startup with outsized returns on investment.

Conclusion

Investing in a startup is a prudent idea, and the majority of investors who have done so have earned huge returns on their investments. They are also helping to build a sustainable future and employment.

Some people consider startups as unsafe ventures; however, higher risk equals a higher reward, so don’t miss out on such investments in the future.

I'm a passionate and full-time blogger. I love writing about startups, how they can access key resources, avoid legal mistakes, respond to questions from angel investors as well as the reality check for startups. Continue reading my articles for more insight.

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