Pros and cons of investing in startups

Startup investing is not easy. It could be one of the most stressful prospects because of the rates of failure of startups.

In a previous article, we have spoken about the historic week for the Indian startup ecosystem that saw the rise of six new unicorns in just four days. We have seen these companies make massive jumps in their valuation. Also, recent trends in the US markets particularly show that returns post-IPO aren’t as lucrative as investing pre-IPO

Before reading about the pros and cons of investing in startups, you’ll need to understand the advantages startups get for staying private for a longer duration:

  • Startups won’t have to deal with retail investors or hedge funds, who may try to manipulate the valuation or buy a stake in the company. The founders will have the final say most of the time.
  • Startups can avoid massive expenditure in fees involved with market regulations.
  • Startups can avoid the pressure to deliver investor-friendly quarterly results, and focus on setting their company up for longer-term success.

Now, the main advantages for angel investors, venture capitalists, and private equity funds in investing in startups and private companies include the following:

  • The tremendous upside in case of the startup making it big. The return on investment can be humongous in the event of startup exit, for investors as well as founders.
  • Compared to publicly listed companies, investors can get more of a say in direction of the startups’ journey depending on the ownership percentage.
  • Depending on the jurisdiction of the startup operation, investors may be able to avail some tax benefits for the amount you invest in early-stage startups.

However, the story of startup investing is not as rosy as it sounds. The main disadvantages of investing in startups or private companies are the following:

  • There is a massive amount of risk, especially with early-stage startups. There is a high chance that an early-stage startup might fail and a good chance that a later-stage startup might fail. There is also a good possibility that a well-performing later-stage startup might not be able to get the desired exit, resulting in a mediocre return on investment for an investor.
  • The lack of liquidity for your investment. You will mostly be unable to sell your shares until the startup gets an exit.
  • The investment portfolio could become less diversified.
  • It is not easy to constantly be aware of investment opportunities in various startups.
  • It is difficult to even be aware of the opportunities to invest in specific startups, let alone get a seat in the funding rounds.
  • Considerable time must be given to research before investing in a specific startup compared to investing in stocks.

Startup investing is not easy. It could be one of the most stressful prospects because of the rates of failure of startups. However, the journey of helping to grow a small company into a big organization is an adventure of a lifetime and it can provide one of the biggest learning curves in the business world. Also, funding startups can help provide massive value to customers, while changing multiple lives, and contributing to the nation through employment, wealth creation, native product creation in the national goal of self-sufficiency.