Investing In Start Ups
Investing in startups gives you a ringside seat to solutions for challenging problems or the development of new technologies.
Growth potential. Large-cap stocks in the S&P 500 are far less risky than startups, but there’s seldom room for exponential growth. If you pick a successful startup, however, the sky’s the limit. There’s so much opportunity for expansion.There’s an enormous multiplier effect that could be huge. That’s part of what an investor would be buying. Belief in a new idea. Startup investing may appeal to you because it’s about entrepreneurs pursuing a new idea. People often invest in what they want to see in the world, whether it’s more sustainability or a really cool sneaker company.There’s no better opportunity to see something that you want in the world and to support that.
Startups are super risky. About 90% of all startups fail, due to a lack of product-market fit, marketing problems, team problems or other issues. There’s possibility for total loss. In general, startups are only a good investment if you’re prepared to lose 100% of what you’re staking. The vast majority of your investing dollars should ideally be in index funds and exchange-traded funds (ETFs), or even just individual stocks. Startups are illiquid investments. If you bought a stock today and changed your mind tomorrow about your choice, you could easily sell it. Startups, on the other hand, are highly illiquid. When you invest in a startup, you should expect that your money will be tied up for at least three to five years, if not more.Although you can have the opportunity to liquidate through secondaries, it’s not a guarantee, and your investment will likely take years to mature and materialize.
Investing in startups is not for the faint of heart. Founders, friends, and family (FF&F) money can easily be lost with little to show for it. Investing in venture capital funds diversifies some of the risks but also forces investors to face the harsh reality that 90% of companies funded will not make it to initial public offering (IPO).For those that do go public, the returns can be in the thousands of percent, making early investors very wealthy indeed.
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