Investing in startups makes investors an integral part of the startup team where their inputs, insights, domain expertise and mentorship are sought-after.
In conservative or traditional settings, people chose those instruments and avenues to invest, which could provide assured returns at a low risk, even if it meant lower returns. So, a majority of the people would typically choose time deposits with banks and post offices or invest in Government bonds and savings certificates.
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Investments in stock markets, now more popular, are still not preferred by many since they are considered to be high risk, with a high probability of losing money. People get even more jittery at the thought of investing in startups since there is a widely held misconception that startups are an even higher risk than stock markets. It is true that both types of investments, startups and stock markets, involve high risk.
But investing in startups has some advantages worth considering.
Promoting Innovation By Investing In Startups
The most important advantage of investing in startups over the stock markets is this. The core of a startup is innovation whether in product design or marketing or business model or strategizing or problem-solving. Investors get an opportunity to not only promote innovation but also become innovators themselves by providing unique insight, valuable feedback and handholding support to the entrepreneurs.
The Timing Of Investment Is Not An Issue
While investing in stock markets, investors must exercise caution and choose an appropriate time to invest; investing in bearish and bullish markets have implications on returns. But the timing is not an issue with startup investments (non-IPO investments).
Diversification Of Portfolio
Investments in startups are a good long-term strategy. Stock markets have easy access and flow of credit, and little friction to participate. This, in turn, leads to speculation and creation of bubbles. When these bubbles burst, markets crash and cause high volumes of losses.
These can be short-term investments at best. But there is a lack of credit flow into startups due to the risk involved and a lot of friction to participate, which by itself alleviates the possibility of bubbles being created. Macro-level market trends and fluctuations do not necessarily affect investments in early-stage startups and thereby, reduce risks and improve the returns on investment by diversifying the portfolio.
Additionally, early-stage investors often get higher rewards than those who join in the later stages.
Fostering Ideation That Contributes To The Larger Good Of The Society
There are startups that ideate solutions to societal problems or that offer life-changing solutions for the greater good of the society or disrupt the market in ways that benefit many. When investors put their trust and thereby, their money in such startups, they are essentially contributing to social welfare and positively impacting the lives of many.
Promoting Job Creation
Startups are vehicles for large-scale job creation. Through their investment in startups, investors are essentially creating positive externalities and contributing to job creation, better income and a better standard of living.
An Integral Part Of The Startup Team
Investing in startups makes investors an integral part of the startup team where their inputs, insights, domain expertise and mentorship are sought-after. It also gives investors a certain amount of power and control on the working of the startup.
In summary, investing in startups instead of investing in stock markets will help investors diversify their portfolio, increase returns, reduce risks and promote ideation and innovation for the welfare of the society as a whole.
Similar to the other investment avenues, investing in startups should be done with careful consideration and after a thorough vetting process. It is advisable for first-time investors to take the help of and leverage investor platforms and have the vetting process and other heavy lifting done through them.