New Businesses: Investing In A Startup Venture

Before You Hand Over That Check...

Investing in a startup venture is one of the most exciting things that you can do with your money. Many people feel good being an "angel investor" and helping someone else realize their dream. While you are doing something nice, you also have the potential to earn a return of hundreds or thousands of percent. However, you also have a very good chance to lose all of your money.

Most startup businesses eventually fail. Fifty percent of startups fail to make their fifth anniversary, and only 16 percent of startups stay open for a full 10 years. With this in mind, it is very likely that you will lose all of your money. Then again, if the business does succeed, you should make a very generous return.

One of the reasons that many startups fail is that they lack adequate financial controls. To protect your investment, ask for a copy of the startup's financial statements and have professional bookkeepers and CPAs review them for you. Confirm that they have good cost controls in place and other sources of capital. If other entities are willing to invest in a start-up venture, it could indicate that you are in good company.

If the startup venture that you invest in does succeed, you may need to figure out an exit strategy. While startup investors had historically gotten taken out by IPOs, they have become much rarer. Between the cost of actually doing an IPO costs and the cost of complying with the Sarbanes-Oxley Act once the company is public, more and more companies are opting to stay private or to be acquired. Furthermore, if the company completes an IPO, you may not be allowed to sell your shares.

Within these risks lies great opportunity, though. Even in the face of these risks, open-eyed investors who fully understand the risks that they are taking can find diamonds in the rough. While investing in new venture carries great risk, the potential to fund the next Genentech, Apple Computer or Google makes startup investing potentially one of the most rewarding things that you can do with your money.

For any questions about startup ventures or investments, contact us here. We're here to help you resolve all your planning questions.