In the U.S., 90 percent of startups fail within five years, and only 50 percent survive beyond five years. So why do so many financial planners and advisors recommend that as a part of a balanced portfolio you should invest in startups?
Although startups carry greater risk, seasoned investors and newcomers alike have always found them to be an attractive investment opportunity. The potential for huge returns comes at the cost of higher risk, as with most financial instruments.
Several big-name venture capital/angel investors circle around to invest in the next big startup in TV shows like Dragons Den (UK) and Shark Tank (USA and AUS). Did you know that equity crowdfunding allows almost anyone with a small investment amount to invest in their favorite startup?
For example, Sydney-based startup graduate, Canva, was valued at $55 billion after its latest funding round earlier this year, making it the world’s most valuable private software company. International beverage giant Lion acquired cult favorite craft brewery Stone & Wood for $500 million, inspiring the rise of innovative privacy-tech platforms, Openly, and viral recyclable toilet paper business Who Gives A Crap, as well as a new wave of disruptors.
It’s official. Now is the best time to invest in your favorite startups, and here are our top reasons why.
A GUIDE TO INVESTING IN STARTUPS
- Take advantage of high potential returns/buyouts by getting in early
Investors who join in the early stages of a business can achieve high returns on their investment. When compared to existing companies in mature industries with slower growth rates, startups often have high growth rates, which increases their value rapidly. A startup’s shares will likely be valued at an attractive rate when they are young and private, which means you’ll be able to earn high returns once the company has been acquired.
Based on the performance of the US venture capital industry since first trading in 2012, the Thomson Reuters Venture Capital Index has returned an annualized average of 32.60% compared with 20.75% for public equity (NASDAQ Composite TR). Through IPOs, share buy-backs, mergers and acquisitions or secondary market trading, investors can achieve a return on their investment.
An example is the £2.8 million raised by Camden Town Brewery in 2016 from 2,217 investors. After being acquired by AB InBev in the same year, investors received an estimated 70 percent return.
- Portfolio diversification opportunity
Startup investments present an excellent opportunity for investors to spread portfolio risk. A startup whose shares aren’t publicly listed tends to have less correlated returns with the market, so negative shocks to the market tend to be less impactful (unsystematic risk). Furthermore, equity crowdfunding offers an accessible way to diversify holdings across industries, stages, and risks due to its low entry barriers, no hidden fees, and a range of investment opportunities.
Any investor can spread portfolio risk by investing in startups. A portfolio with shares in an unlisted startup is less likely to be affected by negative market shocks and therefore has a lower unsystematic risk. In addition, equity crowdfunding provides an accessible way to diversify holdings across industries, stages of business, and risks thanks to its low entry barriers, no hidden fees, and variety of investment opportunities. There are many crowdfunding platforms, but one of the best in terms of ease of use and diverse offerings is WeFunder.
- The opportunity is exciting
The majority of startups identify a market niche that they are trying to fill. An Equidam study updated in 2019 predicts that the average startup will grow its revenues 178% in the first year, 100% in the second, and 71% in the third year. The startup sector provides investors with exciting investment opportunities that cannot be found anywhere else. Businesses that can capitalize on these gaps in the market, as well as related attractive market trends and opportunities, in a timely manner, with a strong, scalable business model, offer investors a unique investment opportunity.
Additionally, one of the most compelling reasons to invest in startups is that they can give you the chance to be part of something exciting, innovative, and new. Unlike passive investors, early-stage investors offer advice and perspective to startups, offering a hands-on approach and taking an active role.
As an example, the opportunity currently exists to invest in a unique approach to dating that is poised to revolutionize the $3.7B dating app market. Poze is a dating app that connects singles based on common charitable passions, and donates the proceeds from fun charity date auctions to worthwhile nonprofits. Already live on the App Store and Google Play Store, the company has been completely self-funded to date and the co-founders are offering a unique opportunity for early investors to gain equity prior to launch. Because of the unique value proposition, and a product that exists at the intersection of two massively growing sectors (dating and charitable giving), Poze is a great opportunity for individuals to expand their portfolios, and potentially receive a very advantageous ROI based on the current valuation. Learn more about Poze and check out more details of the investment opportunity here.
- Socially conscious investors engage in impact investing
The potential intangible benefits of investing in startups go beyond financial motivation for socially conscious investors. Investing in local, innovative businesses that fill a gap in the market and solve problems yet to be addressed by larger companies is more popular than ever before. Over the past two years, more than half of Australian startups focused on sustainability and the environment, according to Giant Leap Ventures’ Impact Startup Benchmark Report 2021.
Poze, the company we mentioned earlier in this article, has a dual mission of helping connect people through shared passion, and providing funds to philanthropic organizations that the non-profit doesn’t have to work for. This type of business is becoming more and more useful, as the cost of obtaining funding becomes outsized for many charitable organizations. Learn more about the mission of a company like Poze at poze.app.
Similarly, investors are interested in purpose-led brands that are driven by their desire to champion a meaningful cause. Because of this fact, businesses like Poze stand to be successful in the market because they appeal to a demographic that is interested in not only selfish pursuits, but also making an impact in the surrounding world.
Investing in startups has never been easier or more profitable. Diversity your portfolio today to attain higher rates of return on investment and increased financial stability.