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Thomas Jefferson famously stated, “With great risk comes great reward.”
But the man was no average Joe debating whether or not he should invest in startups. Newbie investors no longer need to have millions in disposable income to invest in startups and get in the game. That’s why so many early-stage startups are bootstrapped, with finances from friends and family keeping the engine going.
The fact is that 90% of startups fail. Those who are lucky enough not to fail can only reach a balance, no loss, no gain. So how can one proceed with caution when trying to get one’s feet wet in the realm of early stage investing? After all, it is known that if you wait to invest after a startup goes public, you are missing out on up to 95% of the profits.
Yes, the reward that can come from a wise investment is abundant. With that in mind, here are some tips worth considering if you’re looking to invest in startups for the first time.
1. There are many rewards attached to the initial investment
As a newbie investor, you may be wary of investing in startups because of the risk factor, but the rewards should also be considered. For example, investing in startups will help diversify your portfolio by adding a high-risk, high-reward asset class.
It also works wonders if you want to strengthen your personal brand, as it puts you in a position to learn about and from new entrepreneurs and what they’re building, and possibly support them in the process.
As an investor, they will open new doors for you, allowing you to connect with other investors, founders and esteemed members of the industry you are passionate about. When it comes to returns, if you’re an early stage investor funding a startup that turns out to be successful, the returns can significantly outperform other types of investments.
Related: 3 main advantages of investing in startups
2. You can help drive innovation by keeping a private company
The initial public offering (IPO) used to be considered the ultimate goal for entrepreneurs, especially those behind tech startups. However, a growing number of entrepreneurs are choosing to delay going public or even remain private indefinitely.
One of the main reasons for this is that it allows their team to focus on innovation, which may appeal to you as an investor if you’re passionate about technology. After all, there’s no denying the fact that things can get a little messy internally after an IPO, such as public market investors trying to force executives out of companies.
Related: How private companies can compensate top talent and retain cash
Investment platforms are an option to start with
Not everyone has a personal connection to a startup seeking funding that they are truly passionate about. There are also many investors who would prefer not to invest in startups run by their friends or family so as not to let money come between their relationship.
So what’s another great way to get involved in seed investing?
You may want to look at some investment platforms. There are many to choose from, such as FundersClub and SeedInvest. These platforms work in a similar way, offering lists of startups on their respective platforms, descriptions and terms such as investments and minimum fees.
There are also blockchain options, such as Decentralized Autonomous Organizations (DAOs), which offer growth and funding opportunities for startups while reducing risks for investors. According to an article on NASDAQ by Hatu Sheikh of DAO Maker, “The fluidity, perpetuity and resilience of a DAO can never be matched by any company. Therefore, a new level of efficiency with clear demarcation of capital and government awaits us all in the near future.”
Of course, for anyone who decides to go down the blockchain route, it would be advisable to deeply evaluate a couple of investment options before moving forward. This is because scalability and organizational structure are often top concerns for companies with DAO-style governance.
According to Investopedia, “Unless you’re a founder, a family member, or a close friend of a founder, chances are you can’t get in early on an exciting new startup. And unless you’re a wealthy, accredited investor, you’re likely that you cannot participate as an angel investor.”
It’s also important to note that with changing times come changing conditions, especially considering the fact that many startups have had high valuations, even during the pandemic. However, this changed rapidly in the post-pandemic world as consumer behavior, preferences and expectations have changed.
New and potential private investors should be aware of the three points mentioned above so that they can engage in seed investments with more confidence.