For about 10 years, there has been an explosion of interest in investing in early-stage businesses. Many small savers and young people with entrepreneurial concerns are venturing into underwriting startup capital increases, believing that the business idea will be a successful and their money will multiply.
Crowdfunding platforms are receiving an increasing number of startups requests looking for financing and are offering their business ideas to small savers who trust in the platform’s analysis of the goodness of the investment and the relative safety of the investment. Unfortunately, nothing could be further from the truth. Risking the money by subscribing to a capital increase in a company or in its early stages is a high-risk investment.
Every saver or investor has a risk threshold, which means he is willing to invest and risk his money without much thought, but up to a certain amount. Depending on the volume of savings and the needs that this investor has as an individual, the risk threshold can be high or low. An example is the purchase of an EUR 20 lottery ticket, where the investor does not carry out an analysis of the relationship between risk and return because, for him, that amount is very far from his risk threshold, which delimits the impulsive decision from the reflexive decision over the pros and cons.
Startup investors can be classified as follows:
- Individual investor who invests small amounts of money with the vague hope that it will be multiplied because the business idea ends up being successful.
- Individual investors who follows the classic “Business Angel” pattern, which can usually reach a maximum of EUR 150,000. His idea is to become a mentor or advisor to the company in order to revaluate his investment by selling his shares in one of the financing rounds in which a professional or industrial investor enters.
- Professional investor who manages the assets of others, either through investment vehicles or by advising “capitalist”. In these cases, the investment decision is made according to a procedure of analysis and evaluation of the goodness of the investment opportunity.
How can you earn money by investing in startups?
Normally a startup goes through successive phases in which it must seek capital, which are called “financing rounds”, to develop the business and turn it into a “company” that generates distributable profits and make the leap into the capital market or integrate itself into a multinational company.
The possibilities of making money from such an investment are diverse, as follows:
- Through the sale of the participation with a capital gain in a subsequent financing round. In many cases, when the startup has completed a first phase of business development, structured it, defined its income model and the obtention of operating metrics that prove the goodness of the investment, the search for financing to consolidate business development is considered through “institutional” investors, i.e. professional investors who channel the investment through commercial vehicles (Venture Capital Funds in their various meanings) or industrial investors (companies that see the opportunity to grow inorganically or diversify their business).
- Through the sale of the participation when the startup has reached a relevant business volume and exploitation metrics to attract the interest of the capital market and the exit to the Alternative Stock Market (MAB) is considered. In these cases, the shareholders who maintain the corporate control usually offer the small investors who trusted them in the initial stages the possibility of selling their participation and obtaining a capital gain.
- Through the profits sharing distributed by the company. This possibility is the least likely since it is common for startups to generate profits but not to generate money to distribute to their shareholders. This happens since the company’s growth requires funds to finance it and unless a situation of stability has been reached and the company becomes what is known as a “cow” business, which means it does not need to grow and produces abundant fruit for its partners, or in other words, money of free disposal with which to reward its shareholders. This situation requires a longer period of time and normally the investor prefers the capital gain to the late dividend.
The evaluation of the goodness of the opportunity to invest in a startup requires professionals with experience, knowledge and procedures that allow a glimpse of the possible future of the company and the possibilities of multiplying the saver’s investment. This is Delicias Capital’s mission and that of every analyst who prides himself on it.