The Pros and Cons of Investing in Startups

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By Jacob Maslow

Startups, especially in emerging markets, are an extremely popular investment option, especially among angel investors and VC funds. New businesses allow you to go beyond traditional markets to find worthwhile investments that offer higher risks, but often much higher rewards. There are several benefits to investing in a startup.

Pros of Investing in a Startup

Investing on the Ground Level

Investing in companies that are just starting in emerging markets allows you to begin with a company that has a lot of potential early in their development process. You’ll be able to have more say in the company’s operations, and help the company along as they grow.

Ground-level entry also means you can purchase a larger stake in the company.

Motivation is an Abundance

Entrepreneurs are some the hardest working people the business world. You’ll be able to talk to the CEO of the company and the founders. You’ll play an integral part of the business if you invest in it initially.

Motivation allows many startups to grow, follow the lead of other major brands, and ultimately change the way the business world works.

Investing in a startup is a little more complex than investing in a major corporation, such as Amazon. With Amazon, if you invest your money, you will have little say in the company’s management unless you invest substantial funds. Many startups are looking for capital to gain traction, and you’ll be able to buy a percentage of the company where you may have some say in the company’s operations.

Cons of Investing in a Startup

Valuations Are Often Misstated

Many startups believe that the company is worth more than its real value. Emerging markets often have large evaluations that are more aligned with Silicon Valley even when the company hasn’t gained traction yet.

What this creates is a harder barrier for an investor to invest in the company.

Companies that believe that their value is much higher than it truly is will expect a higher investment per percentage of the company. Investors will need to educate local entrepreneurs and discuss the valuation in true numbers based on the company’s current performance, rather than a developed markets valuation.

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