A startup does not have a specific definition. It is simply a company that aims to create a new product or offer a service to hopefully encourage innovation and change worldwide and therefore find a solution to an important issue in the process.
Investing in a startup can be a risky but worthwhile decision if and when your investments actually pay off. There are a few ways that investors can put some of their investment dollars in a startup. The investments are as follows:
Two Ways to Invest in Startups
1. Direct Investment
Direct investment means you’re investing in a startup without a middleman or third-party involvement, such as venture capital, debt, or private equity firm. An angel investment also counts as a direct investment.
2. Indirect Investment
Investing indirectly in a startup will require the involvement of venture capital, debt, or private equity firm. In this method, the third party will raise money with the help of investors like yourself to invest in different startup companies.
Note that you will need to talk to your financial advisor when taking this option. That is because your advisor will take care of researching the profiles of all the funds that are trying to raise money during that time.
There may also be some paperwork that needs to be done before you can give your money to the fund.
Factors to Consider Before Investing in a Startup
Founders
When investing in a startup, you don’t have much validation to rely on. That is why the founder(s) is your best source. The founders are at the center of the startup’s business matters, and in a way, you’re putting money in the idea and the group of people who will be executing it.
Concept
Startup investment is basically an idea with not much sample assessment for validation. Therefore, it is essential to properly grasp the concept and the company before investing in it.
Market Scale
A startup needs to serve a big enough market to raise its potential to grow significantly in the future. That way, you have a good chance of receiving a decent return for your investment.
Startups are called as such since they do business on a huge scale to pursue dominance in the market. On the other hand, a young company that only operates in a specific location or a small area can’t exactly be considered a startup.
Competition
Startups seek exponential growth and market dominance. Therefore it is significantly vital for you to know the other companies already in business in the market so that the startup you’re considering investing in has some good plans to keep up with or outperform them.
Benefits to Investing in a Startup
High-Profit Potential
A startup usually has a high potential to become the next big company. So if you’re able to invest early in the right startup, you could see considerable growth in your investment in just a few years.
Side-Hustle
Many people usually invest in startups as a side-hustle to have an extra source of income. Considering the hype and advancement continuously occurring in the startup space, researching and investing in startups is an excellent way to spend your spare time.
The Risks of Investing in Startups
High Potential for Losses
While startups have high growth potential, they also carry substantial risks. In other words, you could lose a lot of money in case the startup collapses or goes bankrupt.
Startup investments are made at an early period. Therefore, there is always the possibility that the business model and workforces will not be as solid as an established company.
Volatility
Startups can be highly volatile during their first years of being in business. The volatility not only applies to its profits. It also applies to its founders, teams, investors, rivals, and market position.
That is why startups often carry a high level of risk and uncertainty from a financial and emotional standpoint when you invest.
Holding Period
The average holding period of startup investment is usually seven to eight years, making it a very illiquid investment. Therefore, investing in a startup would not be a good idea if you want your funds to be easily accessible in case of emergencies.
