By Richard Hartung
If you’d invested $1,000 in Facebook at its advent in 2005, your investment could be worth more than $600,000 today. Entrepreneurs are continuing to start up new companies, from financial technology to beauty product firms, that could follow in the social media giant’s footsteps to be the next game-changer. Even if you don’t set up a company yourself, you can still get a piece of the action by investing in startups.
Investing in Startups: High-Risk, High-Return
Investing in startups is indeed exciting, and many of them are creating disruptive new products which can literally change the world. Carousell, Gojek, Grab, JobStreet and Lazada are just a few of the startups in Southeast Asia that have made it big.
The fundamental question individuals considering an investment in a startup need to ask themselves, though, is whether they can accept the risk.
Search online for information about startups and you’ll likely see that nearly 90% fail. This commonly-accepted percentage, however, may be over inflated as other data sources, such as an oft-cited study in 2007 led by Willamette University professor Robert Wiltbank, shows that just over half fail. Regardless, more than 50% likely won’t succeed, and the possibility of losing your entire investment is high.
The advantage of investing, though, is that you can earn a good return if the company succeeds. While data is limited, the 2007 study led by professor Wiltbank also found that the average return was 2.6 times the investment in 3.5 years, or an internal rate of return (IRR) of 27%. Other studies have shown that about 10% of startups increase in value by more than 10 times. Another example, according to Forbes, is that $1,000 invested into Airbnb in 2009 would now be worth more than $550,000.
To earn those returns, however, you’ll usually need to wait until the startup is bought by another company or lists on a stock exchange in an initial public offering. That process can take at least 5-10 years, so you’ll need to be prepared to tie up your funds for quite a while.
If you do decide to take the risk, two principles are essential.
The first is to learn more about investing in startups. Networks here, such as Angel Central, hold classes, while platforms in the US, such as the Angel Capital Association and FundersClub, have online materials. Learning platforms Coursera and Udemy offer online classes, and there are any number of books about investing.
The second is to spread your risk. Rather than investing large amounts in just a few startups, experts suggest investing in at least 10 companies to lessen the risk.
How to Invest
There are several ways to invest. Entrepreneurs usually need more money to grow their business after they’ve tapped into family and friends to get their initial funds, so they often look for investors.
One option is to find companies on your own. You can start by talking to friends and colleagues to find companies or link up with other investors through groups to identify potential investments, then start investing.
BANSEA, for example, organizes educational conferences, workshops, research and networking to match early stage companies with angel investors. Another is AngelCentral, which organizes pitch sessions, angel education workshops and syndication services for members. Startup SG Investors also offers access to co-investment opportunities.
An alternative is to invest through a platform, which pools funds from investors. FundedHere offers investments in early-stage startups, while Fundnel offers pooled investments in early-to-late-stage startups. One consideration is that you may need to be an accredited investor to invest through some platforms, meaning that you have more than S$2 million in assets or income above S$300,000 per year. FundedHere does, though, allow some professional investors with an annual income above S$100,000 and practical investment knowledge.
Minimum investments are usually at least S$5,000 for FundedHere and often at least S$25,000-S$100,000 for Fundnel and BANSEA.
For individuals who are comfortable with risk, yet have less money, investing in the US can be easier. The 2013 JOBS Act opened investing in startups to almost anyone, with the caveat that you can only invest $2,200 a year or 5 percent if your annual income, or if your net worth is less than $107,000. Microventures, SeedInvest, StartEngine and WeFunder as well as other platforms welcome investors and may offer educational materials.
Startups Investing Can Be Attractive
For risk-averse individuals concerned about losing money, it may be preferable not to invest in startups. For investors willing to take some risk, though, it can be worthwhile to learn about angel investing, figure out how to mitigate risk through platforms or other solutions, and consider using the organizations listed here or a multitude of others to put money into startups.