For many startup companies, attracting investment is key to getting off the ground. In recent years, there has been an increase in the number of startups seeking funding from investors.
It's no secret that many startups fail. In fact, about 90% of startups don't make it past their first year. So, how do investors make money from startups?
Throughout this blog post, we'll discuss the different ways investors can make money from startups and why they're drawn to these businesses. So, if you're curious about startup investing, keep reading!
How Do Investors Make Money From Startups
Startups are a risky investment, but can offer rewards if they are successful. Investors are critical players in a startup's journey and can make money in several ways.
1. When The Company Goes Public
One of the most common ways investors make money from startups is by earning a return on their investment when the company is acquired or goes public.
Many investors take this route because they believe in the company's potential and believe it will be successful in the long run.
When the company goes public or sells shares to the general public for the first time, it typically results in a massive windfall for its investors. For example, after Facebook went public in 2012, its co-founder and CEO, Mark Zuckerberg, reportedly became one of the wealthiest men in the world overnight.
2. As Partners
Another way investors make money from startups is by taking a share of the company's profits.
This can happen in two ways: either the investor becomes a partner in the startup, or they negotiate for a share of profits as part of their initial investment.
If they become a partner, they typically receive a fixed percentage of the startup's profits on an ongoing basis. The investor also takes on some ownership in the company and makes vital decisions that can impact the company's growth and success.
On the other hand, if they negotiated for a share of profits, typically, this would include either receiving dividends or a percentage of the company's overall profits.
3. By Holding Stock and Selling It Later
Investors can also profit from startups by holding stock in the company and selling it later for a higher price.
This is a common strategy for many angel investors and venture capitalists, who invest their money in startups in the hopes of generating significant returns in the future.
While there is no guarantee that an investor will be able to sell their stock for a profit, many of them have been successful, primarily if they have invested in a promising startup that goes on to do well.
Overall, there are many ways that investors can make money from startups. While it is a risky investment, the potential for high rewards makes it an attractive option for many investors.
How Much Do Investors Invest In Startups?
Startup investments are often considered high-risk, high-reward opportunities. The amount that investors invest in startups can vary significantly depending on various factors, including the industry, the stage of development, and other factors.
Typically, angel investors invest anywhere from $10,000 to $150,000 in the early stages of a startup's development.
However, this amount can be much higher for later-stage investments, especially if the company is successful and poised for significant growth.
How Much Do Investors Expect In Return For Their Investment?
There is no size-fit answer to the question, as this will depend on several different factors. Many angel investors want to see their initial investment succeed and will be satisfied with a reasonable return on their investment.
However, others may expect a much larger return as part of their investment. But on average, angel investors typically expect a return of about 20% to 40% on their investment.
This figure can fluctuate depending on the industry, the startup's development stage, and other factors. Ultimately, it is up to each investor to determine what kind of return they expect and which startups they are willing to invest in.
Why Do Investors Invest In Startups?
While many risks are involved in investing in startups, there are also many potential benefits. Investors may be drawn to startups for a variety of reasons, including the following:
1. The potential for high returns
Early investments often have the potential for high returns, especially if the startup is successful and becomes a significant player in its industry.
Startups are typically unproven businesses that have not yet proven their viability in the market. However, many investors see this as an opportunity and believe that successful startups could generate much higher returns than those of more established businesses once they become profitable.
2. The ability to shape and influence the company's future
Investors are often attracted to startups because of the opportunity to help shape the business and make decisions that can significantly impact its future success.
If an investor becomes a partner in the company, they typically have a seat on the board of directors and have a voice in important decisions regarding the company's growth.
3. The ability to work closely with the founders
Startups are typically founded by entrepreneurs who have solid and innovative ideas. Investors often value this opportunity to work closely with talented founders and be involved in their vision for the company.
The Role Of Investors In Startups
Investors play a vital role in the success of startups, as they provide crucial funding and support to help these businesses grow and thrive. Some of the main functions that investors perform in this role include the following:
1. Providing capital
Investors are typically the primary funding source for startups, providing the capital that allows these businesses to get off the ground and grow. This initial investment is critical for startups, as it allows them to build a strong foundation and establish themselves in the market.
This capital is often vital for startups to cover salaries, administrative costs, and other operational costs. Without this funding, many startups would be unable to get off the ground.
2. Advising startups on key decisions
In addition to providing funding, investors are often actively involved in advising startups on essential decisions that can affect their success.
This may include helping them to identify key strategies and goals, recruiting new employees, and exploring potential partnerships or acquisitions.
3. Help startups to grow and scale
Investors often have extensive experience growing businesses or working with other startups in their own companies.
As a result, they can provide valuable advice and support to help startups to achieve their goals of scaling up and becoming successful businesses.
Does An Investor Only Provide Funds To A Startup?
No, investors do not only provide funding to startups. In addition to providing capital, they typically play several other roles critical to these businesses success.
Investors know how to grow a startup and what to avoid doing. They have a good experience in this area and can use their knowledge to help startups to grow, scale up, and become successful businesses.
They share this knowledge with startups by advising them on critical decisions, networking to help them find talent and partners, helping them grow and scale up, and providing guidance on achieving their goals.
Overall, investors are an integral part of the startup ecosystem, helping promising businesses to get off the ground and grow into successful companies.
The Risks And Rewards Of Investing In Startups
Investing in startups can be risky, as many startups are still unproven businesses that have not yet been tested in the market. However, there can also be significant rewards for investors who take this risk and back promising startups.
Some of the potential risks include the following:
1. The startup failing to achieve growth or profitability: If a startup cannot achieve the expected growth or if it is not profitable as anticipated, investors can lose their capital.
2. Lack of liquidity: Some startups may go public or be acquired by another company. However, in many cases, investors will have to wait for this potential liquidity event to see any return on their investment.
On the other hand, there are also several potential advantages for investors who risk backing a startup. These include:
1. Potential for outsized returns: While there is no guarantee that investing in startups will lead to high returns, many investors have achieved significant returns on their capital by backing promising startups.
2. A better understanding of emerging industries: Investing in startups often allows investors to understand emerging industries better, which can help make future investment decisions.
Ultimately, investing in startups can be a high-risk but potentially high-reward venture, with the potential to make significant financial gains along with helping profitable businesses grow and succeed.
Therefore, investors must carefully consider the risks and rewards of this investment strategy before deciding whether to back a startup.
Everyone knows startups can be risky investments, but many investors find the potential rewards worth the risk. Whether seeking outsized returns, learning about emerging industries, or helping a promising startup to grow and succeed, investors have many different motivations for backing startups.
Of course, there are also many challenges and risks associated with this type of investment, including the possibility that a startup might fail or that investors will not see a return on their investment for a long time.
However, with careful consideration and research, investors can assess the pros and cons of this investment strategy and decide whether it is suitable for them.