It is no secret that the startup culture has now grown beyond the traditional business environment. Startups are now slowly paving their way to success and profit, and so are those investors who took the leap to invest in an idea that hit the mark. Before moving on to the various risks and rewards involved in startup investments, let us understand how startup investments work.
How Do Startup Investments Work?
In a startup investment, investors put down capital in exchange for partial ownership and rights on its future profits. In case the startup idea is a success and the company profits, the investor gains returns proportionate to the amount invested. However, if the business fails, the investors lose the invested money.
This is how briefly a startup investing works, let us now take a look at the advantages and disadvantages of Startup Equity Investing.
Rewards of Investing in Startups
- Diversified Portfolio: As mentioned earlier, investing in startups is an excellent way of diversifying your investment portfolio, in order to include high-risk assets that are subject to higher rewards. Studies show that investors who have earned profits through startup investments tend to distribute their capital among multiple startups rather than investing in a single one. By diversifying investments, you can obtain multiple profits from different asset classes. It also increases the chances of getting higher returns.
- Networking Opportunities: Through startup investments, you have the opportunity to network with various other investors and stakeholders. This will help you further understand the nuances of the investment and obtain different perspectives. Building connections through startup investments can also pave the way for future investment opportunities.
- Greater Returns: While investing in startups can be extremely risky, it can also be highly rewarding. Compared to other forms of investment, an early investment in a startup can be most rewarding, as the returns may exceed the amount invested by a large margin.
- Creating Employment Opportunities: Investing in a startup, especially during the early stages, helps make or break a company that can impact the lives of several people. Investing in a startup directly or indirectly increases employment rates, thus uplifting the economy.
Risks of Investing in Startups
- Fraudulent Practices: It goes without saying that investing in unverified startups can be dangerous. It is essential to research the founders and their backgrounds, study the business plan and do your due diligence before you decide to invest. You must also stay up-to-date with their progress and keep an eye out for potential malpractices.
- Sudden Complications: One of the biggest risks of investing in a startup is the unexpected complications that may arise. A startup can only be successful if the ideas are innovative and the plan has been executed meticulously. However, there is a possibility that it might not turn out the way it was expected to as the market and consumer requirements are dynamic. While investing in a startup, it is always better to have a backup plan in order to avoid complete loss.
- Liquidity: Liquidity refers to the ease with which you can convert a financial asset to cash without impacting its value. Each asset has a different level of liquidity, i.e, some assets are more liquid than the others. When investing in a startup, your money is going to be in it for a long time. You cannot withdraw your investment or sell your assets as per your convenience.
- No Guarantee on ROI: Many startups tend to fail within a few years of their inception, which means that the return on investments (ROI) is not guaranteed. In startup investments, there are chances that you may lose all your money and walk away with nothing. In some cases, the startup may take a long time to realize its full potential, leading to delayed profits.
Depending on its success, investing in a startup is a high-risk, higher-rewards phenomenon. The success of the startup depends on various factors including the business idea, thoroughness of the plan, efficient execution, customer satisfaction, and many more. While one cannot predict for sure if the startup will succeed, the investors can do their due diligence and stay up-to-date on every minute detail to ensure that their money is safe.
If you are an investor looking to invest in a startup but have no idea on how to proceed, Grip gives you the opportunity to be a shareholder in high-growth startups, with the minimum investment being ? 2,00,000. You will be participating alongside a venture capitalist/lead investor who conducts due diligence and negotiations with the startup, so consider your money is in safe hands. If you want to diversify your portfolio and are willing to take the leap, invest in Startups via Grip!