Startup investing is becoming more prevalent nowadays. Angel investing and seed investing are the two stages of early-stage startup investing in which individual investors can get involved before the institutional investors start to invest in early-stage startups. More people are investing in startups, and a lot more people are considering to invest in startups. Some of the reasons for the increase in interest about startup investing include a substantial increase in the number of startups, the emergence of notable angel investors and seed investors, many investors reaping the rewards of investing in startups that have become successful, and the advent of crowdfunding in startups.
A startup can be a public company or a private company. It is not common for an early-stage startup to be a public company, though there are a large number of early-stage and late-stage startups that have gone public in various stock exchanges across the world. Current and future performance of some public companies is analysed to a great extent by many people and firms, while the remaining public companies are analysed to a lesser extent. The market price of the public stock reflects this future expectation on that stock. So, the below discussion 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 at the event of startup exit.
- If your investment is significant, you can negotiate with the board to get some insider information on company performance. This privilege will help you to observe better the industry in which the startup is operating.
- If you are part of some notable startup exits resulting in a high multiple of your investment, your reputation as a startup investor is burnished. You can make use of this reputation capital for personal gain in many different ways.
- Depending on the jurisdiction the startup operates from or the location where you live, you may 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 encouraging the attempts of some promising entrepreneurs financially. 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: