Investing in startups can seem a little precarious. On the one hand, investing in exciting new ideas - and passionate expertise - can be lucrative. However, various studies suggest around 80% of ventures are doomed to fail. Does this balance out at all for those injecting money into said schemes and innovators?
Overall, yes. While around 40% of small companies prove profitable, the potential income for those that do profit is nigh unlimited. Below, we’ll look at why venture investment is lucrative for those running companies - and those putting the money in, too.
What are the Main Startup Phases?
Funding ventures usually takes place over six key funding phases. These are critical moments in the life cycle of any small business. As either an investor or a founder, here’s what happens at each point:
- Pre-seed: Where project viability, costs, and potential success are analyzed
- Seed: Where foundations are built, experimentation occurs, and firm decisions are made
- Early: The test stage - where firms will have full teams and will evaluate potential products
- Growth: Where customers start to on-board, and a company can start to recruit
- Expansion: Where a business realizes broader ambitions and seeks international growth or beyond its niche
- Exit: Not all businesses head to this stage - where a firm can sell on at a profit, or out of necessity
These phases are also known as stages in the wider world of investing. Investments are crucial at each stage to help small companies refine their products and visions. They are also essential in helping to utilize new tools, market to new demographics, and continually improve services.
However, it is notable that the term ‘startups’ is widely used to describe companies in the early stages listed above. For example, a company may be considered a ‘scaler’ or ‘scale-up’ if it reaches the ‘growth’ stage or phase.
Risks & Rewards of Investing in Startups
Experts in investing in small companies may refer to the ‘Babe Ruth Effect’. Borrowing baseball analogy, this means the home runs (i.e., lucrative profits) are worth the strike-outs (exits and failures). This counters the statistic that between 80%-90% of ventures fail - with the assurance that successful companies make big money. With studies showing venture lifespans likely to extend beyond 3.5 years, this is ample time to mitigate risk.
On paper, investing in a small company may seem highly risky. However, we need to consider some of the bigger payoffs of recent years. For example, Google, or Alphabet, started with $1 million in seeding in 1997. This expanded to $25 million in funding by the decade’s end - by 2020, they’d broken $1 trillion on the markets.
Of course, not all companies benefit from Alphabet’s meteoric success. Therefore, we must consider the wider, more achievable benefits.
Ventures in the US help to bolster national employment. Between 2015 and 2020, for example, companies less than a year into business created three million jobs per year. This figure has only dipped as low as 2.5 million new jobs (2011) over the past 17 years. Regardless of political and global shifts, it’s clear that ventures are crucial to the American economy.
However, all investors must strike the risk/reward balance carefully. Many choose to diversify portfolios with multiple entrepreneurs at once. However, the shrewdest, most successful investors will focus on minimizing risk by directly intervening at growth stages. Careful investors need to look carefully for red flags that indicate an exit may be approaching.
Successful ventures such as Yelp, LinkedIn, and Facebook have seen immense investor returns. Respectively, these platforms returned 600x, 500x, and 800x+ their initial private offerings. Therefore, when ventures succeed, they do so at immense profit.
How Much Do Startup Employees Earn?
Various research suggests venture employees can expect between $54,000 and $100,000 a year. However, Payscale goes higher, with a projected salary of around $185,000. Generally, studies further suggest that venture employees may not earn as much as they do via in-house corporate. However, there are further benefits beyond financial income to consider.
Ventures generally offer more opportunities - and ergo, responsibilities - to employees. This, of course, is great for one’s resume or LinkedIn profile. Beyond this, smaller companies are, by and large, more likely to recognize individual input.
Small ventures are also likely to differ from corporate entities in mission. Those companies working towards innovation and global change, for example, may offer a more laid-back working atmosphere. Developed corporate, meanwhile, is likely more rigid and structured to help drive profit.
The Payoff for Founders
Finally, venture founders have income and potential all of their own. Despite challenges and stacked odds, more than a million new ventures registered in the US in 2020 and 2021. There is still a genuine thirst to found and run enterprises.
This is not necessarily a result of financial potential. As explored, many ventures do fail. Founding a company in an established niche creates incredible connections for company heads. They also have the chance to develop skills on their own terms and enhance industry employment prospects.
Furthermore, there is the still romantic idea that a small company or innovator can change life for the better. It has happened in the past - and ventures will continue to innovate for the greater good.
What is more, company founders have the opportunity to work at their own pace. They are unfettered from wider corporate decision-making and constraints. ‘Being your own boss’ arrives with multiple targets and constraints all on its own. However, it can be immensely freeing and life-affirming for many people.
A Startup Boom
While sometimes risky to invest in on paper, small ventures and entrepreneurs carry huge potential rewards. Many VCs and investors are willing to take such risks. With more than 500 US companies reaching unicorn status, we are still at the epicenter of a startups boom.
SOURCES USED FOR RESEARCH