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Startups are interesting for many investors because of their innovation and growth potential. Compared to traditional forms of investment, depending on the industry, they sometimes offer significantly higher prospects for returns. At the same time, investors have to come to terms with greater risks. This article shows what options there are for private investors to invest in startups and what to look out for.
These reasons speak in favor of investing in startups
A central problem for many young, innovative companies is financing. Most banks often do not provide loans due to the high risks, and an IPO is often not an option in the early stages of a company. One possible solution is to work with private and institutional investors.
Startups are of particular interest to them because of their great growth potential. If a new idea prevails on the market, there are prospects for significantly higher returns than with traditional forms of investment. This becomes clear with a look at successful startups such as WhatsApp. The company was bought by Facebook for $ 19 billion in 2014. The purchase of Pillpack for one billion euros by Amazon in 2018 and the purchase of DeepMind for 500 million euros by Google in 2014 also impressively demonstrate the potential of investing in startups.
However, the risk should not be concealed. Since these are business models that have not been tried and tested, there is also the risk of total losses. For this reason, startup investments are also referred to as venture capital.
How can you invest in startups?
Investing in startups is not a new type of investment. A current development, however, is that it is no longer only of interest to institutional investors and large investors, but also to private investors. There are basically three ways of participating in the success of young companies.
1. Venture capital funds
Venture capital funds, also known as venture finance companies, are special private equity funds that specialize in startups. Investors benefit from the experience of the fund manager. He knows the market situation very well and can replenish the fund with the most promising startups. The investor doesn't have to do anything. Another benefit is security. Since several companies are contained in a fund, a loss of a startup can be compensated for by profits elsewhere. However, in some cases high fees have to be paid for fund management and the minimum investment volumes are comparatively high.
2. Business angels
Business angels are experienced investors who not only support young companies financially, but also with their experience. In this way, they contribute to the success of the startup and are financially involved in it.
Various business angel networks enable private investors to network with startups and to be convinced of their ideas at regular meetings. The prerequisites for a job as a business angel are usually a sufficiently large amount of assets and a sound knowledge of corporate management.
3. Equity crowdfunding
Thanks to crowd investing, it is also possible for small investors to invest in startups. The whole thing works via platforms on which small investment sums of many private investors are bundled, whereby sufficiently high investment sums can be achieved overall.
Participation in the future profits (or losses) of the start-up takes place through participatory subordinated loans. Profits mostly arise from the so-called exit, i.e. the sale or IPO of the startup.
Advantages of investing in startups
- Investment flows directly into the startup's operational business
- High potential returns
- Promotion of innovative technologies
- Low minimum investment amounts for crowd investing
Disadvantages of investing in startups
- Increased total loss risk
- Less say as a crowd investor
- Little transparency
More security through diversification
Due to the high risk, investments in startups should only make up a small part of your own asset portfolio. Investments in safe companies, markets and countries should form the main part. We recommend large blue chips, i.e. traditional successful companies that are listed in the leading indices of the respective national economy. In addition to indices, stock market letters and sample portfolios also offer beginners an initial orientation when they want to invest in the stock market.
Another comparatively safe form of investment that is recommended in addition to startup investments are funds. They are set up by experienced managers and bundle lucrative stocks, commodities and other underlyings.
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