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When you invest in companies that are still on the path of establishment, you indulge in a high-risk venture. Nonetheless, the rewards may be substantial if and when the investments yield returns. Since the vast majority of new businesses or products fail, the chance of losing one's whole investment exists. However, those that do succeed, on the other hand, can generate extremely high returns on investment.
Why should you invest in companies that are just starting?
The highly anticipated profits are a significant reason people invest in companies that are new, but this is not the sole reason. People are drawn to startup investment for a variety of reasons.
The first is the attraction of financial gains. Unlike public market returns, which are measured in paltry percentage points, business angels speak in terms of multiples - how many times you receive your investment back, which may be 10x or even more. Then there is the thrill of discovering breakthrough or upcoming technology and new business models long before mainstream investors are aware of a "trend" packaged in themed funds.
Furthermore, investors like assisting young entrepreneurs in realizing their dreams, particularly if they seek to address society's most pressing issues.
Those who invest in startups are interested to learn more about new things. The environment offered when you invest in companies setting base in the market happens to be extremely lucrative in this respect.
The education delivered by the startup investment process does not, however, relate to technical matters alone. It covers the field of commercial and legal matters as well. When the investor engages with startups, the issues of developing and extending an organization, sales processes, regulator obstacles, competitiveness, and other facets of company life are addressed repeatedly.
It is conceivable to argue that this curiosity is even more rewarded if you invest in companies that are tech-oriented since they push the frontiers of what is technically feasible—simply comprehending the fundamentals of the problem that a high-tech company is attempting to solve. The solution that it is providing necessitates a mental effort. While it might seem like a terrible use of spare time for some people, on the contrary, it is a treat for the naturally interested in remaining on top of the technological trends.
The funds you invest in companies just starting up generate better average financial returns than public equities markets. According to Cambridge Associates, during 20 years, venture capital returned 11% annually (net of fees and carried interest), compared to 7.5% for listed stocks. These data are now from previous years, and they solely apply to the United States. However, a general outperformance of private markets over public markets makes logical sense given that venture capital is more illiquid (you cannot sell your assets anytime you want) and riskier asset class than stocks. As a result, investors anticipate larger returns from venture capital.