If you are looking for new ways of diversifying your investments, startups can be a good choice. Keep in mind that even the biggest company you can think of, once was a small business looking for capital. Here are some pros & cons of investing in a startup.
There are over 400,000 new businesses created every year in the U.S., so the options for investment are practically endless. The most attractive part of investing in a startup is that they offer a potentially significant return if the business takes off.
But as there are so many startups trying to make it each year, most of them fail, so this is a risky investment. Let’s see the pros and cons you need to consider before making a decision:
1. More investment options
Established companies only offer shares to investors. But startups offer a range of options for you to choose from, because they are looking for capital. There are some crowdfunding platforms, like SeedInvest that will enable the user to invest small amounts of money in a startup.
2. Initial investment can be lower
When you invest in a company, you get control of a portion of it. The good thing about investing in a startup is that with a small amount of money, you get control of a significant part of the business.
3. Wide range of industries
There are startups in many markets and industries, so a great way of diversifying your portfolio is to invest a small amount of money in startups across different markets.
1. Unpredictable failure
Many factors can’t be predicted nor controlled that could affect a startup
2. Lack of liquidity
When investing in a startup, you should keep in mind that you are probably not going to be able to sell your stake until the company either goes public or is acquired. And there is no way of knowing how long this will take, but it could be years.
3. It might be difficult for the business to prosper
Whether it is because the market is very competitive, because the business idea doesn’t work or because the owner is not equipped to build a successful company, many startups fail to prosper. Be very diligent and do some research to find out how that particular industry is doing and see if you can get to know the entrepreneur a bit better.
If after reading the list of the key pros & cons of investing in a startup you feel this is an option for you, the best thing to do is to take the time to do some research and make sure that you invest in businesses that are sponsored by capable entrepreneurs. It is also a good idea to only invest an amount of money you can afford to lose.