What are the risks and rewards of investing in start-ups?

Eric Ky

Investing in a start-up should be the result of a long reflection. It should not be forgotten that this type of business, by its “youth”, can be weakened in a very competitive context. It is good to question the risks and rewards of investing in start-ups.

The risks of investing in a start-up

Investing in an unlisted company is not without its risks. Knowing the risks you may be facing will allow you to make your investment in the world of private equity with confidence.

Capital risk

Investing in a start-up involves owning shares of that same company. The value of it evolves according to the performance of the start-up. In the event of bankruptcy, your initial investment is then entirely lost. You have no possibility of recourse.

However, around 50% of start-ups are declared bankrupt after 5 years of activity. So you have a one in two chance of losing your entire financial contribution. Hence the importance of diversifying your portfolio and of investing not in a single start-up but in several, each with smaller financial contributions.

The risk of lack of liquidity

Investing in an entity not listed on a regulated market complicates the possible resale of shares. Indeed, it is difficult to reconcile demand and supply. The investor is then exposed to the risk of having to sell his shares at a price much lower than their real value.

It is therefore preferable to invest an amount that you do not need in the medium term.

The risk associated with dilution

Depending on the expansion the start-up is experiencing, your share of capital may shrink with each new round of financing.

These three major risks must be known in order to best understand your investment in a start-up. Keep in mind, however, that the higher the risk, the greater the potential return.

The rewards resulting from investments made in start-ups
The investor is not just limited to providing financial capital. By virtue of his role and his involvement, he also benefits from rewards.

Knowledge transfer

Investing in an “early stage” start-up allows investors to provide young teams with their enriching experience both in terms of network development and the transfer of know-how, etc.

Thanks to this practice, these businesses can develop efficiently. Choosing carefully your investor-partner allows start-ups to benefit from a significant advantage.

Take part in the launch of a new business

Investing in a start-up means that you are part of an entrepreneurial project which can prove to be exciting. Your involvement as an investor is reflected in particular in the support of a young team with the aim of stabilizing the company and ensuring that it is sustainable.

You can therefore follow the development of your investment step by step in a real economic context.

Act responsibly

It is clear that in recent years, more and more eco-responsible companies have emerged. The latter, obtaining positive results, therefore gain in value. They are attracting more and more interest not only from large groups but also from networks of Business Angels, which are very inclined to invest in ecological projects.

Investing in start-ups has its drawbacks. However, your investment can also look like a reward as soon as the young start-up in which you have invested is experiencing strong growth. By fully involving yourself in its operation without going beyond your rights, your investment will result in complete success.

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