How Profitable Is It to Invest in Startups?

invest in startups

Investing in startups is all the rage at the moment. Since the Internet 2.0 age has come about after the throws of the first tech bubble meltdown, novice tech investors, and season veterans have been more inclined to invest in startups than ever before. Lets go ahead and take a deeper look at some of the reasons.

What are Startups?

In small terms, startups are exactly what their names state: companies which are at the beginning of their career. But to be more specific, they have their particularities. Most of them have in common the fact that they were made to respond to a market request. However, this request is not an obvious need. It is more of a solution to ease a certain activity.

For example, application creators are startups. They all accept the fact that their success is not yet established or guaranteed. So they release on the market their ideas turned into products. At this point, there are two options.

  • The product may be succcessful. Then, they need to create new ones that maintain this success.
  • The product is insuccessful. In this case, the start up needs more resources, in order to find a successful path.

However, startups are now supported and encouraged and have plenty of opportunities to grow. You may even consider them a trend in economy. They can be risky. But one of them can even be tomorrow’s richest company.

5 Tips to Efficiently Invest in Start Ups

1. Take Advantage of Their Image

There has been no time ever in history where information travels as fast, and as freely, than now, our in current age. All things startups are plastered over every newspaper, over every magazine cover, and over every internet site. They make the topic du jour. It is now hip, and cool, to invest in the startup of the day.

At cocktail parties, if you are able to convey and have conversation around getting into the recent private offering, or meeting with the newest young entrepreneur to hit the scene, you are suddenly cool, and people will pay attention to your story.

2. Discover the Most Profitable Ecosystem

This is actually one of the key reasons why the current tech world is in the current state of hyper growth, and hyper upside as it currently stands today. Today, if you are looking to invest in startups, you would be wise to consider which tech ecosystem to enter. As an example- a tech ecosystem is something like an or a Bitcoin/blockchain technology provider.

Entrepreneurs are seeking out funding to build minimum viable products on the backs of this current technology. Consider the Amazon FBA program. Amazon FBA is a business unit within the parent company that provides independent sellers the ability to source product. Then they send it in the an Amazon warehouse, and put the fulfillment, shipping, and deliverable into Amazon’s hands. Many companies have been founded to address supply chain, logistics, warehousing, and optimization in this vertical. Some other examples are crowdfunding platforms or product research platforms. You may be an investor in a public capacity or simply a private individual. Still, you can find yourself looking to these areas of the markets to invest in startups.

3. The Niche of Customer Experience

It would also make sense to consider seeking out startups that seek to optimize, and improve the customer experience in several areas of the marketplace. To do this would diversify your investment dollars. Also it would give you the possibility to have your return uncorrelated with the market. A thought process here that is worth researching further is the healthcare market- both from a services and a business solutions framework.

Companies such as Oscar and Zenefits have been built on the investment thesis of optimizing the customer experience. They also specialize in eliminating friction from the marketplace. If you were to seek out companies such as this, consider researching similar or like kind companies. This is to capture similar upside with an invest in startups mindset.

4. Diversify Your Investment Dollars

Diversification is perhaps one of the most simple way to understand tenets of investing. It is easy to see why one would seek to diversify their investments, and their net worth. The more eggs you have in the basket, the more risk you have controlled if something goes wrong. If one particular investment goes sideways, or belly-up, you have minimized your downside. To be sure, the professional investor does practice concentration. But again, that’s why they are professional investors. They spend their day to day, their professional job and time at work, meeting with entrepreneurs, networking, mentoring, and engaging with other folks in the business. When they seek to invest in startups, they do so from a position of strength and power. They have armed themselves with the relevant knowledge base, to cut risk to a level they are comfortable with, all the while maintaining possibility for maximum return.

This is where the concept of risk adjusted return comes from. When you intend to invest in startups, it is all about maximizing your risk adjusted return. The concept is, how much upside can you expect, for each incremental amount of risk you take on. Figuring out this number, and applying it mathematically is what the best investors do as a means of allocating their dollars to invest in startups. Remember though- diversification is as much an investing tool and tenet as it is a risk mitigator. As an example, if you have 10 startup investments- if one is a complete home run, 3 fail, and 6 have middling, average returns, you still come out ahead. This is why it is prudent to diversify instead of putting on one investment, in one startup, with the following three distinct possibilities.

  • Failure;
  • Home run with massive upside;
  • Average return.
silicon valley
Silicon Valley, the “hot spot” of tech investment.

5. Have Realistic Profit Expectations

Which brings us to our final point, and everybody’s favorite topic of discussion. Profit. On a realistic basis, what is the amount of money I can expect to make from what I seek to invest in startups. The answer: as much as possible.

The advantageous thing about this technology cycle is several investment funds have had one investment return their entire fund. Meaning, one investment in one startup did so well that it compensated for the lack of upside in other investments inside the very same fund. The technology investors that do it best are chronicled online.

Final Thoughts

The best follow a disciplined, systematic approach with regard to investment allocation and sizing the particular type of investment. You can choose for investemn one of the hottest names in Silicon Valley. So in sum, the startup investing game is not for the sensitive ones. And it is just that, a game. A game of chess which pits investors vs. entrepreneurs vs. the runway of product market fit. How quick can you bring a product to market, test it, put more capital behind it, and watch it take off? That is the question.

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