Investing in start-ups can be risky. However, when start-ups take off, the potential return is huge, Patrick O’Brien says.
Investing in start-ups is trending as 2016 takes a massive turn towards expediting innovation and entrepreneurship. We hear about a new idea being funded almost every minute. Right now, it is an exciting phase globally, with almost every country trying to nurture a start-up ecosystem to counter the uncertainties of economic imbalances and loss of jobs due to tectonic shifts in the investment and consumer markets.
Given the scenario, angel investors and venture capitalists have the potential to change the world by supporting the right founders and their start-ups.
Malta is an ideal breeding ground for start-ups, giving budding entrepreneurs access to quality talent and lower burn rates of capital. Most importantly, there are young entrepreneurs coming in from all over Europe to take advantage of what Malta has to offer.
One of the reasons why a start-up ecosystem thrives is the availability of capital for a founder to get started or to scale up. While funding for scaling a venture is the interest of venture capitalists, seed funding for starting up is mostly fuelled by angel investors.
There are two types of angel investors: structured and professional angel groups or unstructured and individual investors. Obviously, the structured and professional angel groups are making the most out of the windfall gains when a start-up makes it big.
However, there is still a huge gap between the number of aspiring entrepreneurs and available angel funding today. There are a few million of us who are yet to warm up for the game or may be sitting on the fence! Angel investors and venture capitalists are now seeking opportunities which allow them to expand their portfolios – investing in start-up is key. As an investor they would be contributing to an entrepreneur’s attempt to innovate for the betterment of society through a valuable product or solution.
For investors, participating in the bottom of the pyramid economy as one of the privileged few means they also benefit from managing a large enterprise which once was a small business or a start-up. For many investors, the appeal is securing a place in the innovation economy while being engaged in the routine of a large enterprise without any conflict of interest.
Investors also benefit from the growth of a start-up by taking up an active role, if and when the need arises, while getting to know the dynamics of a start-up ecosystem as an insider.
Diversifying the investment portfolio from standard offerings in the market such as fixed deposits, property and mutual funds to a direct experience of investing into those value creators who drive the stock markets eventually is attractive. Reap windfall gains of multiple times the original investment from an eventual exit by promoters to a larger acquirer or from a planned IPO is the ultimate goal.
The only obstacle to jumping on this bandwagon seems to be the fear of losing the small portion of one’s own net worth in case the venture idea does not take off as expected. Nevertheless, the feeling would be better than a rollercoaster ride at Disneyland.
The potential return for angel investors and venture capitalists can be huge. Profits from a successful start-up can be in the thousands of per cent and if a company is able to reach the level of going public profits can be in the thousands of per cent. However, any early stage or start-up business is considered very high risk, no matter what the business is. As a result many angel investors want a higher return in exchange for this risk, ideally 30 to 40 per cent.
Some will accept less and some will want more but this should be your realistic target and objective for what an investor wants for return on investment. The odds of increasing the investment returns can be increased by retaining close ties with the company even after the initial investment. When the angel investor continues to be attached with the business, their experience can help flourish the business. So far the typical angel investor tends to invest in local companies as it is easier to do due diligence in local companies before writing checks. Furthermore, mentoring local companies is convenient for angels.
This article first appeared in the Zest supplement carried in The Sunday Times of Malta.
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