Investing in startups can be a high-stakes game that pays off for those who can navigate the risks and rewards. This article explores the pros and cons of startup investments and how equity crowdfunding is changing the landscape of startup financing.
You don’t need to be a shark to realize that startups are a way to invest in the future of industry and innovation. Getting in on the ground floor of a new company with high growth potential can be hugely rewarding. Even better, owning a stake in that new company can change the game entirely for your investment portfolio. However, these investment opportunities come with their own set of risks.
The shiny appeal of investing in startups can influence even the most prudent businessperson to make critical judgment errors. We are breaking down the risks and rewards of investing in startups and how owning a piece of the company through equity crowdfunding flips the script in startup financing.
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Risks of Investing in Startups
Investing in an idea or a full-fledged business comes with its own risks, including a high failure rate and a lack of liquidity for investments. Unfortunately, many startups will fail for reasons both in and out of the founders’ control. A shaky market, unreliable funding resources, or incompetent management can destroy a startup's chance at success before ever making it out of the concept phase.
As an investor, you can mitigate some risks by conducting due diligence on the company you want to invest in. Taking a critical eye to their business plan, the potential for growth, and barriers to entry can save you time and money in the long run.
Rewards of Investing in Startups
The potential rewards of investing in startups vary from a high return on investment (ROI) to an opportunity to make critical improvements in society through supporting the visions of talented entrepreneurs. A high ROI is a primary reason investors fund a startup; after all, success stories from once-upon-a-time startups like Airbnb ($100 million), Slack (recently acquired by Salesforce, valued at $27.7 billion), and Uber ( $80 billion) are highly motivational. Early investors in these massively successful companies received huge returns on their initial investments. Although their success is extremely rare, it pays off in a significant way when the magic happens.
In addition to the financial rewards of investing in startups, there’s also the less talked about benefit of supporting a cause you believe in. Often, startups come with an exciting and impactful mission to improve the world in some small (or big) way. Some highly successful businesses that landed the support of a Shark on the television show Shark Tank have a philanthropic component that sealed the deal. One of Shark Tank’s biggest success stories comes from sock company Bombas, who donates one pair of socks per pair sold and was adamant that their deal had to keep the BOGO model. Despite drawing criticism from some of the Sharks, Bombas has made over $200 million since its inception and promised to donate socks to the homeless for each pair sold. The reward of investing in a startup can come from its profits and its mission.
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Equity Crowdfunding and Investor Risk
Equity crowdfunding differs from traditional startup investing in a few key ways. For example, funds are provided by a collective of individuals instead of one person or entity, and investors are given equity in the company they’re investing in.
The investors essentially provide money to a startup or early-stage company and receive a small portion of the company in return. Traditional funding doesn’t typically give the lender or investor a stake in the business. Equity crowdfunding lends itself to online forums and social media, which is great for generating awareness but may also attract scammers. That’s why it’s important to be vigilant, while still staying optimistic about the increased power behind equity crowdfunding.
Doing some homework on the startup you’re interested in supporting can help alleviate much of the risk of investing in new businesses. Factors like the management team, business model, and product popularity can make or break the likelihood of success for the startup. Researching the crowdfunding platform and analyzing the company’s financials and business plans are relatively simple ways to reduce your risk when participating in equity crowdfunding. Also, diversifying your investment portfolio can help spread your money to various opportunities to increase the likelihood of high rewards and reduce the risk of major financial loss.
Equity Crowdfunding and Investor Rewards
Equity crowdfunding allows investors to own a piece of early-stage companies that are managed properly and have a high probability of success. Trends in the market can help predict the viability of a product or service. Getting in on the ground floor of an amazing business concept can reap a considerable payout as an equity owner. Investing in a disruptive idea that can positively change lives is an incredible way to further the impact your organization has on the world.
Conclusion
Investing in startups through traditional funding, crowdfunding, or equity crowdfunding comes with an array of risks and rewards. By dedicating time and effort to researching your potential investment while accepting the potential for failure, you can enjoy the benefits of joining a startup on its way to the top. Crowdfunding and equity crowdfunding are excellent ways to collaborate with a community whose mission is to support a venture that can make significant waves in its industry.
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