Stocks and shares are your opportunity to invest in some of the biggest companies on the planet, but many investors find they want more than just dividends and a seat at the AGM.
Investing in start-ups is a way to get in at ground level either as a hands-off source of starter funds, or as a fully engaged advisor with a personal stake in the company.
This adds a level of emotional and intellectual reward to the purely financial benefit you get from a rising share price, and it allows you to invest in businesses that accurately reflect your own priorities, whether they are environmental, social or an interest in a particular field like medicine or technology.
So is supporting start-ups a good investment? As you might imagine, the answer to that question can be highly personal and depends on your own ability to spot an investment opportunity that will add value to your portfolio.
How to get started investing in start-ups
Again, there really isn’t one way to get started investing in start-ups, you just have to find one you like, and put your money into it.
For most start-up investors, it’s not about making a quick return. You may need to wait some time for the business to become established; many will fail, even if they are based around a solid idea, and others will take some years to make their first profit.
In the meantime, in many cases you can work closely with the company, especially if you have an established track record or reputation in a relevant field as an investor or as a businessperson in your own right.
Every investment is a learning opportunity; this is true in all cases, but especially when learning to invest in start-ups, and every gain or loss you make will help you to more clearly define your future strategy. Even if you lose, identify the lessons you can take away with you.
How to succeed investing in start-ups
Success is not always under your control – starting a new venture is hard and there are all kinds of external market forces to navigate.
But if you are a people person with good business acumen of your own, your involvement should give the fledgling company every opportunity to thrive.
There is a theory that states only a relatively small percentage of venture capital investments will account for the vast majority of profits – so for a better chance of success, you either need to be very good at finding those, or you need to be able to invest in multiple businesses.
Diversification even within a venture capital focused portfolio can insulate against isolated market forces and allow you to access gains from different industries and disciplines, without your investments competing against one another.
Multiple investments reduce the total level of risk within your portfolio, as losses in one area are more likely to be offset by gains elsewhere. Again, this is true of any investment portfolio, but it also holds true specifically when investing in start-up businesses.
When to invest in start-ups
Buying into start-up companies is not for everyone. Each deal is inherently high risk and unlikely to return much of a reward in the short term – at least not a financial reward.
As such, you may want to build your capital via other investments before you start putting funds into starter firms.
If you want to be able to offer hands-on support, you will also need relevant experience in that industry area – think of it like filling gaps on your CV when looking to move into a new career.
But if you have the funds, the knowledge and the personal motivation, then it might be the right time to think about investing in start-ups and helping others to realise their own ambitions in business.
When start-ups go well
If you are smart enough – or lucky enough – to choose a start-up that goes on to be successful, the gains can be considerable, especially in lucrative industries like technology.
You usually won’t see a return for several years – up to a decade or even more in some cases – but once a brand takes off, it can often achieve massive yields in a short space of time following years of painstaking preparation.
As they say, it takes ten years to become an overnight success (a quote attributed to Amazon founder Jeff Bezos, among many other successful investors) but when it goes well, it often goes very well indeed.
Disclaimer: The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.