Venturing into startups can either be one of the best things one can do or can lose a great deal of money. Nonetheless, before venturing into this financial venture, one should comprehend any aspect that is associated with this venture.
Observing the trends that have been on the rise in the recent past, one of them is the funding of startups. The ability to garner large amounts of money critical for its growth and the simultaneous ability to spur technology and economic development makes it very attractive to investors. However, like every kind of investment, investing in startups also consist of some inherent risks that must have to be look into.
This has been catalyzed by factors like attractive talent that comprises of young and highly skilled professionals, government and private backing and/ or funding, and the use of technology. New establishment has developed in different fields such as, technology, bio-technology, financial technology, and renewable energy amongst many others, and they are increasingly attracting both indigenous and international investors.
However, this growth development has not been without some management hitch. One of the challenges that some of the startup organisations encounter is that they are unable to obtain capital for most of their activities during their initial stages. Further, competition was reported to be high as well as uncertainty due to the companies’ young nature leading to some of the emerging companies folding up. However, there are several issues regarding entrepreneurship for which prospective business persons need to prepare themselves. Based on the Informa D&B data, information the number of the registered companies in Spain lies at 23, 383 where majority of the companies are under the startup. According to PwC, Spain is the fourth country for the density of a startup and these startups provide work to about 140 thousand people.
While in this article the focus will be made on startup investment and the advantages that such companies possess, as well as the dangers which threaten the capital involved into such business.
Pros of Funding New Companies
Venture capital funds can be rather profitable if investor’s profile corresponds to the characteristics of startups. Some advantages include:
Potential for Exponential Growth
The returns that are associated with funding a startup company are multiples of some of the most lucrative investments that one can embark upon. If the particular company which the investor is putting money right from the stock’s introduction proves to be profitable then the investor stands to gain massively. Some start-ups can go up in value in a fairly short time bringing good returns to its early investors.
Access to Innovation
Investing in startups give an ability to contribute to the further development of the technologies and solutions, which can change entire fields. Thus being part of this innovation journey can be quite fulfilling and financially remunerative since it closes the gap towards improvements of technology and hence the benefits of society.
Portfolio Diversification
Therefore, when formulating your investment strategy, the consideration of startups can help in diversification. A diversified portfolio is beginner’s rule every expert investor advised to use in order avoid concentration of investment in one sector or investment opportunity.
Increased Involvement
Depending on the type of startup and the investors’ interests, some ventures can help investors to be involved in the business’s progress. This can include anything from giving advice regarding strategy and planning to using your contacts. They may not necessarily want to micromanage the operations of these organizations but want influences them they invest in.
Real Threats and Dangers of Investing in a Startup Company
High-risk, high-reward could described potential investments since they can be risky in nature. This is even more so in the case of start-ups whereby the prospects of high returns which conceals the risks in the business.
Some of the risks to consider include:
High Degree of Uncertainty
Businesses are new, and thus there is a lot ambiguity concerning the sustainability of the startups. Some new businesses fail within the first three years and this means that the investors are likely to lose all the money they invested.
Limited Liquidity
Thus, the investment in startups is a long-term process, and secondary offerings of shares or stakes are usually problematic because of the absence of developed markets for this purpose. This limited liquidity is as such disadvantageous as it may limit the ease at which an investor can access his investment capital.
The other weakness is the absence of business experience and expertise accompanied by no record of accomplishment of the organization. New businesses are comparatively risky investments due to the fact that they fail to have a definite record of performances, hence it becomes challenging to evaluate the growth trends, and profitability of such businesses. All investment decisions have to be grounded on factors such as forecast and evaluation of risks; concepts that are often althought and fraught with vagueness.
Regulation and Compliance
Another issue that I would address as a startup is legal regulation which seems to be a challenge since there is no way around it. New business models may occur in the nonstandard fields, which will make the compliance processes rather challenging. Failure to do so leads to fines, penalties which cause a nails to investment returns.
Insight into the Advantages
Exponential Growth Potential: Some Specific Way
The option for the exponential growth is probably one of the most compelling reasons why people invest in startups. Investments made at the beginning of these firms such as Uber, Airbnb, as well as Facebook, resulted in business owners enjoying massive profits. This possibility of high reward is a big plus for many investors; this is because the utilization of high-risk strategies is made justifiable by the likelihood of having the greatest possible returns. But it is crucial to bear in mind that, although, such case can be rightfully considered successful, it is still rather the rarity than the rule. Indeed the high returns yields will be accorded a proportionate risk as the rates of return are high.
Starter companies refer to the early stage in which the investor is able to fund the company before it gains much ground in the market. This stage is rather volatile but at the same time offers the largest potential for growth. A successful start-up can change the entire industry and therefore there are sharp spikes of valuation. For example, firms that operate in the technology industry especially software development companies could grow rapidly because the cost of acquiring the next user is small.
Access to Innovation: Warning: This Animation Could Cause Seizures in Some People Driving the Future
Startups are company formations at an embryonic stage, this means that by investing in startups you are putting your capital into the next technological and business model transitions. The start-ups are a place where most of the new idea germination and growth takes place and can lead to a revolutionizing change in society or the way business is carried out. For instance, innovations such as artificial intelligence, renewable energy, biotechnology and financial technology, among others are probably initiated by start-ups before being picked up and scaled up by large corporates.
Thus, investing in such concepts should not only be interesting from the point of economic gain but should also be interesting and desirable on the personal level for investors. Such gratification is easily gleaned from the fact that one’s money is being used to fund innovative technologies and ideas to society. The desire to be associated with areas that actually make a difference in the progress and hence, betterment of society is one attribute that makes many people to venture into startups.
Portfolio Diversification: Diversifying the Risk
Diversification makes total risk in investment low, so one is assured of lesser risks. Because they are high-risk investments, startups can complement an investor’s portfolio due to their nature of high risk high returns. Diversifying and involving various classes of investments such as stocks, bond, and real estates alongside with start-ups can be useful in regulating high risk from start-ups with gains from conservative securities.
Also, startups can establish themselves more easily in industries that are not as dominated by large, mature incumbents. Investing in these areas may allow one to tap into new growth avenues that may not be possible by direct investments. However, investors cannot afford to be too over-exposed in high-risk tripping security, such a problem should be avoided at all costs.
Greater Involvement:
Contrary to public companies, for which the investors rarely can directly interfere into the companies’ affairs, the startup investors are often given a chance to become engaged into the processes. This may cover offering tactical counsel, using contacts in a particular industry, or being allowed to take part in a company’s decision making process.
Such an engagement can be very fulfilling to individuals with knowledge and experience in different sectors of the economy. This is common since it gives a direct channel through which investors can participate in enhancing the performance of the startup firms they invest in. Besides, it gives a typed of practical operating view of the company’s future prospects, which may prove a useful investment tool.
A Detailed Analysis of the Risks The Risks Mentioned Above Can Best Be Understood if the Following Analysis of the Threats is Conducted:
High Degree of Uncertainty: The Rate of Survival of These Start Up
Many people know that a vast majority of startups do not survive for long. There are many factors on when and how a business is likely to fail, however, other studies indicate that 9 out of every 10 business fails, with many of them not lasting up to one year. This tells the level of risk or rather the level of unpredictability involved with startup investments. Some of the reasons for this high failure rate are; weak market demand, lack of capital, weak business plans and high competition.
Everyone, particularly those who invest in start-ups, has to be ready to lose all their money invested in the business. This is a high risk and therefore needs one to follow several precautionary measures, including a proper evaluation of the status of the startup and all the factors that determine the feasibility of the business.
Limited Liquidity: Cashing Out Remains as the Biggest Challenge that Customer Facing Teams Come Across
Investing in startups is normally a long-term affair but usually proves to be very rewarding. Unlike the stocks in the public limited companies that one can easily sell in the stock market, the investments in start-ups cannot be easily sold. IPOs, also, may take years before they can be realized, meaning that the characteristic of illiquidity may deter most investors from venturing into being investors in private companies.
But on the same note, this long-term horizon can be a disadvantage for persons who require a more immediate admission of their money into an investment. Investor’s liquidity requirements should be well understood and investor should expect that his money might be locked up for longer time.
Lack of Proven Track Record: Assessing Possibilities
Entrepreneurs especially those starting up are, by default, relatively inexperienced and therefore end up making some mistakes. This makes it rather difficult to judge their performance moving forward and how well they are likely to perform in the future. There are very few fences that investors can use when investing by buying stock in a new comer through early stage financing; they have to base their decisions on projections, market analysis of the industry which the founder is in and the founder’s vision and ability. Although these can be beneficial for one to learn, they are by far prejudiced and ambiguous in their nature.
It is for this reason that risk, and especially that pertaining to third-party entities, emphasises the need for adequate due diligence. The startup must be analyzed for market attractiveness, competitors, and the business plan that it is following and its founders. Thus, industry expert contacts and second opinions can also reduce this risk too.
Regulation and Compliance: Legal Obstacles and How to Overcome Them
That is why startups work in industries and markets that can be quite young and often unregulated or only partially regulated. Moving through these regulatory terrains is not easy and can be very expensive. Non-compliance with the laws and regulations exposes the startup to hefty fines legal cases that may render it unprofitable and thus the rates of return on the invested capital to the investor become un-realizable.
Any investors should make sure that those startups which they invest have good compliance measures and legal backup. One way to address this risk is to study and be aware of the changes in this environment to least affect the operations of the startup.
Conclusion: Free Versus Risky: Concept of Risk–Benefit Ratio
Entrepreneurship investing can be financially very lucrative as well as give people the opportunity to support new companies. However, these precious opportunities are closely followed with great risks. Its novelty, low liquidation, managers’ inexperience, and regulatory difficulties must be considered and approached with meticulous attention to details.
However, these are risks that one would be willing to take once he or she fully intends to popularize his or her concept. Essentially, successful startups can produce exponential returns, advance technology, and increase the economy’s growth rate. Thus, thanks to the use of the model of diversified and long-term investments and performing own stringent checks, investors can act more effectively and adapt better to conditions of the constantly changing and complex field of startup investing.