Investing in Startup Companies – Understanding the Risks

Every investor dreams of finding a company that has yet to take off and investing in it early. This is the ultimate buy-low sell-high scenario. How many investors wish that they could go back in time and invest in some of the tech giants that are around today when they were just small startups? The unfortunate truth is that startup companies fail more often than they succeed. Investing in a startup involves a good deal of risk, but the rewards can be incredible if an investor is able to find a company with the potential to really hit it big.

By far, the riskiest way to invest in a startup company is for an individual to invest in their own. While this does give a person the ability to be the master of their own destiny rather than having to answer to a group of investors, most small business owners simply do not have the skill set necessary to make this work. One of the easiest ways to get involved investing in startups is to become an angel investor. This is often done with a group of other like-minded individuals so that they can spread the risk amongst themselves.

The majority of individuals that invest in startups generally get their start by using a venture capital firm. These are businesses that specialize in investing the funds from a group of individuals into startups. This can be a low risk way of getting in to the start up investment game. Firms that have a good track record can minimize the risk that is normally associated with this type of investing. The drawback to this type investing is that the individual does not feel the same connection with the startup he otherwise would have.

Any investor that does not want to take the venture capital route should try to concentrate his or her investments in an industry that they understand. If an investor knows nothing about the type of business the start up is involved in, he will have no idea of whether or not the decisions being made are good. Above all else, it is important for any investor to look at things from a long-term perspective. By their very nature, startup companies can take a great deal of time before they become profitable. It can take years for a company to truly establish themselves so patience is definitely a virtue for investors.

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