Investing in Startups vs Established businesses

Right. So, by now, most of us have probably heard about how investing in Apple or Google early on would have made anyone a crazy amount of money. There are countless (for the purpose of this blog) other examples how jumping in the boat at the most opportune time can make an investor generationally wealthy. And for most companies, that moment lies at the very beginning.

That’s the reason startups tend to attract a solid inflow of investments

Money makes more money. Every successful investor knows and lives by this mantra. It’s also fair to say that today, money not invested loses its value rapidly. Naturally, investing at least a part of your wealth seems like a good idea.

But, not every investor sees a fit with what the stock market has to offer. There’s a particular group of investors that tend to look for the more profitable investments, even if those investments are generally viewed as less secure than the more established options.

You could be a part of that group of investors if you have one or more of the following:

  • Time – if, for example, you don’t have an occupation, or it isn’t very taxing, you may have more time on your hands to dive into new business ventures.
  • Higher risk tolerance – when a startup ‘makes it’, investors tend to make a lot of money. Especially, the earlier you invest. However, investing early can be especially risky. Most startups never ‘make it’ – a harsh reality that leaves many investors without their investment, much less a return.
  • Youth – time and risk tolerance is relative to your age. On top of that, it’s undeniable that most startups are started by fellow youth – it’s easier to believe in and understand the ideas of your peers.

Any combination of the former can help you decide for or against investing in a startup. From there, you have more than one path to take, too. For example, if you’re wealthy enough and your risk tolerance is on the higher side, you can invest in a startup directly in return for equity of the business. That’s called an angel investor. It should, however, be noted that investing a large sum of your own money into a business that’s in the startup phase is very risky. That’s why angel investors typically invest in a business that’s just out of the startup phase and show promise, but lack funds for development and growth.

Venture capital funds are another way to invest in startups, however, they also require a significant amount of investment that simply isn’t available to most people.

If you don’t already possess that sort of wealth, there are other means of investing in a startup. Crowdfunding is one. Startup investment platforms provide opportunity to anyone wishing to invest. This can provide you with any of the following: 1) return of interest; 2) equity in the company; c) dividends.

When should you avoid investing in startups?

As with anything that bears a promise of riches, there’s a catch. In order to understand and navigate the prosperous-yet-oft-perilous world of investing, you must continuously study and weigh your options. That’s especially true, when dealing with startups – each individual case is a virtual unknown. You may be familiar with the industry. You may even be familiar with people involved. However, every business faces a multitude of factors before it even takes off the ground. Not to mention the barrage of issues it will face in order to keep it going.

Unlike the more traditional stock market where you simply purchase equity from any given established business, investing into a startup may very well require you to spend more than just your money, too.

All the aforementioned will take your time. That may be perfectly fine for someone, who isn’t obliged to a 9-to-5 schedule and is willing to fill out spare time or find an occupation of some sort. Or for someone who’s on the younger side of the age spectrum – enthusiasm and abundance of energy make up for the loss of time fairly well.

However, if you don’t have any time or youth to spare, you’ll find yourself better off with investing in the stock market, mutual funds, bonds – all in that order. Additionally, a startup may take exceptionally long to pan out, depending on the scope and industry in question. This means that you may be unable to cash in your return until then.

Time will, naturally, factor in your risk tolerance, too. The less time you perceivably have, the lower your risk tolerance. As you approach the later stages of your life, it’s perfectly normal to not want to risk your life savings for the promise of great returns. You may not want to find yourself losing sleep over when your investment might mature, when it’s taking longer than expected, and you’re in need of cash.

Investing in established businesses has less perks, but..

Actually, only one perk less – the return on your investment will typically be smaller than that from a startup. Simply because an established business has no necessity to leverage their company in order to secure funding. Especially a business that’s already publicly traded – what additional funding they need can be, usually, achieved through the stock market.

An established business will, however, provide you with more guarantees. Starting with the fact that their existence, longevity and profitability is more secure than that of a startup. If the business is publicly traded – you can also get out of the investment whenever you please (whenever the share price pleases you for the purpose of selling).

In conclusion

It is not advised to invest a large portion of your wealth into a single asset class. Furthermore, in a single investment. That goes for stocks, cryptocurrencies, bonds, real estate – and startups, too. Keep that in mind, when making your investment choices.

Investing via a crowdfunding platform can help you diversify your investment, as you’ll be able to allocate your funds to recipients of your choosing, without having to break the bank.

If you don’t have a particularly high risk tolerance due to (but not limited to) your imminent retirement – perhaps it’s better to stick with ETFs, bonds and max out your tax-deferred and tax-exempt savings accounts.