Home » Are Risks and Rewards of Startup Equity Investing Right For You?

Are Risks and Rewards of Startup Equity Investing Right For You?

  • by

Making startup equity investing business can pay well. Any investment carries substantial risks and investors should be ready to handle potential losses. These opportunities were earlier limited only to wealthy venture capitalists or angel investors. Now it is possible for retail investors also to invest in businesses thanks to a number of crowdfunding websites and online marketplaces.

How does Startup Equity Investing work

Digital sites like Tyke and Grip list startups seeking funding. Grip only accepts Accredited Investors and has a minimum commitment requirement of $2 lakh. Tyke allows regular investors to start with as little as $5,000. (AI). The AIF receives shares equal to the aggregate value of all retail investors’ investments, and the AIF distributes partial units to each retail investor.

Retail investors must invest in Grip through Anicut Grand Capital, an alternative investment fund (AIF) registered with the Sebi. Each retail investor receives a portion of a unit once the AIF receives shares equal to the entire amount invested by all retail investors. Tyke offers a platform through which anybody may invest.

How much should an investor allocate to startup equity investing?

Our view is that a first time retail investor should start cautiously in risk assets like equities. They should get their risk profile assessed by a SEBI Registered Investment Advisor. Based on that they can decide if equity investing is suitable for them. Startups are highest on the risk reward ratio. Mortality among startups can be 95% plus. Therefore a retail investor starting in equities can start with an amount that they are willing to lose for good. For some it could be 1% of their net worth, for others it could be 5% or even 0.1%.

Should Investors Diversify within startup equity investing?

If a retail investor has decided to get into startup investing, then they can use the rule of diversification to mitigate the high risk involved. This means having exposure to anywhere between five to ten startups. If they do not have the time to track such investments, then this game is not for them. At the other end of the spectrum, successful angel investors usually invest in more than ten startups leveraging their professional networks and deep industry knowledge.

Investment Advisors Caution About Risks in Investing

We all know that the success rate of startups is low – between only 10% to 20%. Hence investors must be cautious and be ready to lose all their capital in such risky investments. The platforms may even ask investors to make such a declaration. Investors ought to ensure that their lifestyle is not impacted by any potential losses incurred in startup equity investing.

Conclusion

Startup equity investing is not for everyone. Only savvy and wealthy investors with a stomach made of steel and deep expertise in the chosen sectors must be ready to invest in such ventures. The payoffs could be immense but then the risks are also equally high. Hence investors must adopt diversification and suitable asset allocation to protect their personal wealth in this high flying journey. Taking advice of a personal registered investment advisor will help in evaluating such decisions.