Startup Investing

Startup investing is becoming increasingly prevalent. Angel investing and seed investing are the two stages of early-stage startup investing in which individual investors can get involved before institutional investors start to invest in early-stage startups. More people are investing in startups, and many more are considering it. Some reasons for the increase in interest in startup investing include a substantial rise in the number of startups, the emergence of notable angel and seed investors, many investors reaping rewards of investing in startups that have become successful, and the advent of crowdfunding for startups.

An early-stage startup investment is a venture bet.

A startup can be a public company or a private company. It is uncommon for an early-stage startup to be a public company, though many early-stage and late-stage startups have gone public on various stock exchanges worldwide. The current and future performance of some public companies is analysed extensively by many people and firms, while the remaining public companies are analysed to a lesser extent. The market price of a public stock reflects this future expectation on that stock. So, the discussion below is on startups that are not public companies.

Advantages of investing in startups

The main advantages of investing in startups that are not public companies:

• You get to benefit from the tremendous upside if the startup succeeds. The return on investment can be superlative in the event of a startup exit.
• If your investment is significant, you can negotiate with the board for insider information about the company's performance. This privilege will help you better observe the industry in which the startup operates.
• If you are part of notable startup exits that result in a high multiple on your investment, your reputation as a startup investor is burnished. You can use this reputation capital for personal gain in many ways.
• Depending on the jurisdiction in which the startup operates or the location where you live, you may be able to avail certain tax benefits for the amount you invest in early-stage startups. Please consult your tax adviser for more details.
• You will get the satisfaction of financially supporting the efforts of some promising entrepreneurs. If a venture is meaningful to you at a personal level or is innovative, you will get the satisfaction of being part of that.

Disadvantages of investing in startups

The main disadvantages of investing in startups that are not public companies:

• You will be taking up a high amount of risk, especially with early-stage startups. There is a high chance that an early-stage startup might fail. There is a good chance that even a later-stage startup might fail. There is a good chance that a well-performing later-stage startup might not achieve the desired exit, resulting in a mediocre return on investment for an investor.
• To give you perspective, angel investing is more aggressive and riskier than investing in small-cap equities.
• You will not enjoy liquidity for your investment. You will not be able to sell your shares until the startup gets an exit. Some startups allow the secondary sale of shares of early shareholders, but these are few and occur only when specific stars are aligned.
• In some jurisdictions, you need to be an accredited investor to invest in startups. This restriction can be overcome if the startup you are interested in investing in opts for a crowdsourcing funding round.
• It is suggested that you invest in startups only with your 'play money'. That said, if the amount of play money you have is not substantial, you may consider crowdfund investing in startups.
• Your investment portfolio can become less diversified.
• Unless you are a limited partner of a venture capital firm or a large family office, you may not get access to invest in later-stage startups. If you intend to invest directly in a startup, you usually can do it only during one of the seed funding rounds before the Series A funding round of that startup.
• It is challenging to be aware of the opportunities to invest in specific startups. Accessing the startup fundraising deal flow is not easy. Those who enjoy the advantage of quality deal flow will get the opportunity to invest in the most desirable startups.
• You need to devote considerable time to research before investing in a specific startup.