It can be a risky business investing in a startup. However it can also be rather rewarding, should your investment come to fruition. Many startups do not make it, so investing risks losing everything. However, for those that do make it; high returns on investment can be achieved.
Startups go through a number of stages. For those individuals who invest in a successful start up in the early stages, the rewards can be greater than those for investors who join at a later stage.
What is a startup?
A startup is a company that is still only in the ideas stage. It has no working product, just a concept for one, no customer base and no stream of revenue. Figures show that around 90% of startups do not make it to the initial public offering (IPO) stage.
The stages of a startup
Each startup begins with an idea. At this stage the new company is self-funded through their own savings, bank loans or through the issuing of equity shares. This is what most people think of when they consider startups – handing over a small amount of money in return for an equity share. This money is mostly used for things like market research.
The next stage sees a startup become a proper startup, where it moves into operations and begins to collect revenue. They may also pitch their ideas to a private investor. This investor could provide the first money for the startup since the initial stages. The money that is put up at this stage may be small, but it is also that which is most at risk of being lost.
By the third stage a solid business plan will have been developed and whilst the startup may not be earning any profits it will be gaining pace. It is at this point in a startup that venture capital gets a look in. Venture capitals are there to provide greater sums of money and often take up a role as an advisor or as a director on the board of the company. Venture capital can be a private partnership, an investment fund or even an individual.
All too often those people who get in on the ground floor, at the first stage are friends and family of those involved in the startup. It is usually wealthy investors, who can afford to lose money who come in at the second stage. The third stage is often the best one for private investors.
Is investing wise?
The big question is – should you invest in a startup? A lot of that decision will depend on the startup itself. How good are the ideas and what experience do those involved in the startup have? Do they have that initial backing?
If the answers to these questions are positive then it may well be worth investing. However it is always important to remember that you should never invest more than you can afford to lose in this type of business because there is always a chance that you may not get any money back, including your initial investment.