4 Reasons to Invest in Startups in 2020

“To bear fruit, you must believe in the seeds you sow today.” We can say the same about investing in startups. Startups are innovators, pioneers, and very ambitious with their goals. Though it’s difficult to gauge their future potential without a track record and solely investing in its brand vision and execution.

In the past, investing in startups was reserved for the high net worth individuals, but the advancement in crowdfunding platforms has made it possible for retail investors to now invest with smaller amounts too.

As it is with every investment, startups come with a set of risks and rewards. Here, the risks can be as high as losing your capital. So why do investors pour so much money into startups? And as a retail investor, is investing in a startup worth it? Let’s find out.

1. Superior Growth Potential and a Great Diversification Opportunity

Traditional investment vehicles like Government bonds, stocks, real estate, or deposits are generally considered safe and they offer average returns. They may help you keep up with inflation, but building wealth will take a long time at such a low rate.

But if you have built a very safe portfolio, investing in startups can be a great way to diversify and generate higher returns with capital you can lose.

According to an article on Forbes, a well-managed startup investment portfolio can yield over thrice in 5 years and nine times in 10 years. With the returns that these investments offer, you only have to be right 2 out of 10 times to turn an excellent profit.

This being one of the main reasons why angel investors continue to invest in multiple startups and manage and mentor the founders. Even if a few of those startups fail, one good startup can yield them their time’s worth of money.

2. A Chance to Actively Manage Your Investment

Most investors like to have their investments grow without a lot of time commitment. And that’s a fair expectation. But if you are a person who likes more control over their investments, startup investments can offer the right opportunity for the same.

With startups, you are part of shaping the direction of the company you’ve invested in. This is particularly useful when you have strong expertise and experience in the industry. With an experienced and well-networked investor, the startup also has a much higher potential for success.

Now how much time you commit is open for discussion, and you can choose to be as active or as passive as you like. This can be discussed and fixed during the investment. The difference with an active approach is that you can go from an investor to an angel, who offers the money to sustain the startup and the advice required to grow and scale well.

3. Startup Investment Can Help You Become an Impact Investor

Impact investment has become a common term. Previously, investing was only about giving a company the funds to invest in a project and getting a share of profits from the sales in return.

But the newer generations of founders are more focused on making a difference in the world. They want to make sure that their startup changes a specific industry and makes consumer’s lives better.

Impact investment also opens up the doors for startups that are working on social change.

On the surface, a startup may look like just another product in the industry. But many times, impact-focused founders work on changing the product so that a strong pain point is resolved.

Consider, for example, Proton mail; it seems like  “just another” email service but there’s one major distinction-

Their entire focus is on giving users a truly encrypted email experience. They offer client-side encryption, so your email is encrypted before it reaches their servers. So only you have access to your emails, whatsoever. You can go further with encrypting your emails with a key so only the intended receiver with the key can read through your email.

Though their audience may not be large, people are more aware of privacy concerns with large email providers with access to worldwide news. And the users that care about their privacy would be delighted to make the switch. So people who choose to go with such a service are highly motivated to solve the problem and much more likely to purchase a paid plan.

4. Opens Lucrative Doors for You

As a startup investor, you are exposed to a large set of skills that high growth companies require. If you participate in the startup operations actively, you end up learning those skills yourself.

The next startup investment you make can gain from your experience growing the first one.

But the skills you learn have much wider use.

Think startup consultants or startup advisors. They are people who have learned through experience the ways to get a startup off the ground quickly and effectively. And they are revered and highly paid for the same.

Now, if you are just starting as a startup investor, you may not receive the same benefits right off the bat. But as you invest in more startups and see them grow and fail from the ground up, you’ll understand what works and what doesn’t, hence building your portfolio. And that’s where you can begin venturing into full-time consulting.

It then turns into a cycle where you can charge higher and continue to invest in more startups.

Conclusion

Though it does seem risky to start with, startup investment offers an excellent opportunity to experiment with your portfolio, learn new skills, and at the same time, have a high potential of returns.

Once you get the hang of investing small, you can start scaling for bigger, more lucrative opportunities in the future, which may not be made available for retail investors. That’s generally where the more prominent investors are.

Remember, if you are a conservative investor, this type of investing may not suit you. But if you have the risky-bug in you and have waited for this opportunity, there has never been a better and easier time to invest in a startup of your choice.

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About FinanceGAB

Ajeet Sharma is a financial blogger and I am blogging since 2017. Financegab is a personal blog dedicated to personal finance. The main aim of this blog to help people to make well-informed financial decisions.
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