The pros and cons of investing in startups

The good things about investing in start-ups

We all love a good success story, and there are so many out there of investors who have become wealthy after investing in start-ups, they will have you dreaming of becoming a millionaire. And it's true that investing in start-ups can offer great opportunities.

High return potential

This is certainly the main argument when it comes to investing in startups. Investing in a startup can offer considerable returns. These companies often have Exponential growth potential, which means their value can increase very quickly in a short period of time.

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Over the last 10 years, investing in young startups (what we call early-stage startups) has performed the best! The average annual performance over 10 years (2010-2020) of a venture capital fund is 23.8%. The performance of the CAC 40, on the other hand, was... 5.4% over the same period.

Taking an active part in innovation

Startups are often at the forefront of technology and disruptive ideas. Remember Steve Blank:

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“A startup is a temporary organization looking for an industrializable business model that enables exponential growth.”
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When you say industrializable business model and exponential growth, you mean technology and innovation! By investing in a startup, you can have access to these cutting-edge technologies and ideas and promote the development of innovation in society.

Diversifying your investment portfolio

Have you ever heard of Harry Markowitz's modern portfolio theory?

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It's quite simple! This theory states that the various assets that make up your portfolio cannot be selected individually, and must instead be chosen according to the rest of the assets in the portfolio.

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So, for example, if you have a large part of your savings on very secure, but unprofitable investments (a Livret A savings account for example), you can allocate a small part to riskier, but more profitable investments.

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By diversifying, you thus optimize your gain/risk ratio!

The disadvantages of investing in startups

All these advantages are tempting! But still, there are a few drawbacks that you should be aware of.

A high risk of capital loss

Young businesses, and even more so startups, face a high failure rate. According to INSEE, 25% of businesses fail in the first two years and 49.5% in the first five years. For startups, even if there are no official statistics, the failure rate would be much higher.

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Despite their potential, many startups never reach their business goals and end up failing. By investing in a startup, there is therefore a real risk of losing all or part of the capital you have invested.

Illiquid investments

When you invest in a startup, your capital is tied up for a few years at least. Startups often need time to grow and generate significant returns. So it can take several years before you see a return on investment.

In addition, unlike shares listed on the stock exchange, there is generally no active public market to easily resell your shares in a startup. You must therefore wait for a specific event such as a sale or an IPO to recover your stake.

Investing in a start-up requires specific knowledge

Last but not least, investing in a startup requires a thorough knowledge of how a startup and its market work. Understanding the startup's business model, founders' vision, and growth strategy is critical. Not necessarily easy when you are not in the business! You also need to understand how to build an investment strategy that is relevant to your needs and desires.

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Even though some investors are content to contribute money to the startup, it is often recommended that you actively follow and support the startups you are investing in. This can involve a significant commitment of time, effort, and resources to help the startup succeed. Not to be underestimated.

Lessons for investing in start-ups

So, now you're clear on the pros and cons of investing in start-ups. But what conclusions can you draw from this?

Choose your projects carefully

When considering investing in a startup, it is crucial to choose your projects wisely. Carefully evaluate the startup's founding team. An experienced and complementary team, with a clear vision and a solid network, is more likely to succeed.

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Also analyze the start-up's value proposition and assess whether it solves a real problem in the market. That's the basics! A good understanding of the target market and growth prospects is also a plus for making an informed decision.

Diversify your investments

To limit your risks and avoid focusing your portfolio on a single project, allocate your resources to different start-ups and sectors. Investing in several start-ups increases your chances of success and reduces the impact of a possible failure on your portfolio. You can also diversify the development stages of the startups you invest in, including both early-stage startups and more mature startups.

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On a larger scale, also remeber to diversify the types of investments and holdings that make up your portfolio. There is a high risk of loss when investing in startups and you should only devote a small portion of your portfolio to it.

Surround yourself with experts and create a network

Finally, don't underestimate the power of networking. Especially in investment world, where great opportunities can be hard to come by!

Talk to investors with experience in startups. Their advice and expertise can help you assess opportunities and make the right decisions.

Also, take part in events and join communities that promote startups. This will enable you to connect with other investors, entrepreneurs, and industry experts.

Investing in unlisted companies involves the risk of capital loss and liquidity. Only invest money you don't need right away and diversify your savings.

For more detailed information, read our full article on startup investment.