Everything You Need to Know About Startup Investing

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By Adam Sharp

I talk to a lot of people about startup investing.

The most common objection I get to the idea is that it’s a new and unproven market.

It’s true, equity crowdfunding is new.

Investing in startups, however, isn’t new at all.

The only difference is that before equity crowdfunding, venture capitalists (VCs) and other wealthy investors had a monopoly on investing in private startups for 80-plus years.

And the returns VCs have seen over the years are impressive. Over the past 20 years, 1,603 venture funds had an average internal rate of return (IRR) of 55.97% annually. And those numbers are going up over time. The average return is only 34% over the last 25 years and 22% over the last 30.

Those numbers are based on research by Cambridge Associates, the leading index provider for private market returns. Here’s a more complete chart from its Q1 2016 report. By the way, these numbers are after the VCs collect their fees (typically 2% per year) and take their cut of profits (20% to 30%).

The VC and angel investor monopoly started to crumble with the introduction of equity crowdfunding last year.

Today, you can find dozens of startup opportunities across investment sites like Wefunder, Netcapital, Republic, StartEngine, MicroVentures and SeedInvest.

And anyone can invest in these startups, not just VCs and “accredited” investors.

So yes, the ability for average investors to get in on these deals is new.

The only question is whether you think you can handle the risk.
Addressing Risk
The second objection to equity crowdfunding I get is that investing in startups seems too risky.

No doubt, there is some risk.

We’re investing in companies that aren’t fully proven. We go in knowing that 30% or more of companies at this stage could fail.

Big opportunities tend to attract big competition.

On top of all that, these investments can’t necessarily be sold quickly or easily.

That’s what you have to accept going into startup investing.

But there’s a good reason we accept these drawbacks. Because there is no other asset class that can touch the potential returns.

When you invest in a company at the seed stage, it’s often valued in the $5 million range. When you invest that early, a 100X return is actually possible. It’s not likely, unless you invest in a lot of quality startups and turn out to be somewhat of a “good picker.” But it’s definitely possible.

In general, the math usually works out well if you hit at least one big winner.

How big does that winner need to be in order to make money overall? That depends on how many startups you invest in.

If you invest the same amount in 20 startups, you’d hope one of them returns at least 20X. Then, with a few smaller wins, you should come out well ahead.

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Tips for New Investors
Here are a few tips to get going investing in startups…

Spread your bets – invest in at least 10 or 20 startups, preferably more.
Invest small – put only 5% or so of your overall portfolio into startups, and …read more

Source:: Investment You

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