Why do people invest in startups? The reality is that as many as 3 out of 4 startups fail. But it is exciting: because of the passion that drives the founding team, because it’s a great opportunity in the market you’re familiar with, or even because it is a simple scalable solution to a problem. That’s not a good enough reason on its own, so do continue reading to learn about 6 reasons to invest in startups.
Why invest in Startups
1. Reap the benefits of getting in early
The Thomson Reuters Venture Capital Research Index replicated the performance of the US venture capital industry in 2012, and found that venture capital has returned at an annual rate of nearly 20% since 1996 – far outperforming modest returns of 7.5% and 5.9% from public equities and bonds respectively. Those returns may not have been available in Europe or elsewhere. Investing in startups may come with its inherent risks, but the low requirement for overhead capital combined with high upside potential potentially make for a winning combination if it is done well.
2. Become an integral part of a team needs you
Investors of startups and smaller firms tend to take on more active roles in advisory and management than those of more established or publicly traded companies. In part that’s simply because getting in early gives you a higher proportion of voting shares, and by the same token influence over the direction your company takes. Another reason, though, is due to a legitimate need of many companies and entrepreneurs for mentorship, industry connections, strategic management, etc., which go far beyond simply providing funding. Investing in a startup will give you a voice and a position to be an integral part in the most consequential decisions the company will make in the future.
3. Start innovating again with fresh and ambitious entrepreneurs
The entrepreneurial spirit rarely leaves a person once it settles in, and any aspiring or former entrepreneur can attest that there will always be a need to strategize, to problem solve, and to create. If you’re a potential investor who is looking for a way to vicariously experience the thrills of running a startup, collaborating with other entrepreneurs to provide your own unique insights and opinions in addition to funding can prove to be a great way to appease your need decision making in the unknown.
4. Detach yourself from market trends by diversifying
It is well known that continued diversification of your portfolio improves its overall performance, and introducing private equity and venture capital into the mix is a powerful method to do so. The performance of startups are less likely to be affected by macro-level market shifts, in part due to their ability to pivot, and so there is often little correlation between early stage private companies and the behavior of the overall market. Hence, keeping at least a small portion of your portfolio in startups can help reduce risk while increasing returns.
5. Use your investments to bring some good into the world
Investing in startups can yield more intangible benefits as well, specifically for socially conscious investors. Startups are of course on the crux of problem solving and innovation, fueling the discovery and popularization of life-changing solutions that larger firms were unable to envision or bring to market. As an investor you can have a serious impact on the success of those products and services which benefit the lives of their consumers or produce positive externalities for society at large. There are few other ways to create such a profound impact in the lives of others while also acting in your own rational self-interest.
6. Create more jobs through your investments
A surprisingly high number of jobs created come from companies that are less than five years old – in fact, in the United States new firms have created a net average of 3 million jobs while existing firms lose 1 million annually. Getting involved in startups puts you in a place to support this tried and true method of job creation, once again producing positive externalities to benefit the countries your startups operate in as you diversify your personal portfolio.
Sounds interesting? Discover promising startups and learn more about funding via convertible notes: