While most investors are at least somewhat familiar with index funds, hedge funds, and IRAs, a surprising amount don’t know much about investing in private companies.
Investments in private companies are so interesting because they are uniquely fit for wealth creation as opposed to low-risk, low-return investments that are mainly for wealth preservation.
To understand the pros and cons of angel investing, we will compare investment in startups to investment in stocks and bonds—the returns, ease of access, and more.
Alternative Investments and Diversification
Investments that don’t fall into one of the traditional categories are considered “alternative”.
These investments may encompass a variety of assets but all share similarities. Alternative investments tend to be illiquid, unregulated, and risky. On the other hand, they yield high returns and act as a counterweight to traditional investments
Examples include financial assets like startup investments, hedge funds, and cryptocurrency, as well as tangible assets like art, wine, coins, and precious metals.
Investors make alternative investments to diversify their portfolios and to build wealth with their high returns.
Alternative investments have a low correlation with standard asset classes like stocks and bonds. So, in moments of economic downturn when public stocks are tanking, startup investments may be doing just fine.
Comparing Returns on Stocks, Bonds, and Startups
According to research by Goldman Sachs, between 2010 and 2020, the S&P 500 has had an annual average return of 13.6%.
Long-term government bonds, another low-risk, low-reward investment, have fairly consistently returned around 5% per year, according to Morningstar.
Compare these returns to early-stage startup investments. Angel investors don't aim for returns of 14% per year, they aim for returns of 1,000%, 3,000%, or even 10,000% over five to ten years.
These numbers are difficult to land, but this insane return potential is why angel investing has long been a favored tool of the ultra-rich.
Now, the returns are the same, but startup investments are open to all via Regulation Crowdfunding.
Private Vs. Public Investments
The thing that sets one investment apart from another is the valuation at the time of investment.
Almost always, the earlier you invest, the lower value of the company. With early-stage investments, you can get more shares per dollar spent.
Investing $1,000 in a public company will always get you fewer shares than if you invested the same amount early on during a Reg CF round.
This is because the more developed a company is, the higher the valuation, and thus the lower the risk. Safer bets don’t give returns like risky ones.
Pros and Cons of Investing In Startups Vs. Stocks
It’s important to understand how investing in startups is different than investing in stocks.
Risk - Investing in startups is much riskier than investing in public stocks. Most startups fail—plain and simple. But with this high level of risk comes great reward. The returns on angel investments are much higher than any other type of security. This is why it’s important to understand angel investing strategy and make sure it fits in your portfolio.
Hit-or-miss - With startups, you either win big or lose your money. Stocks can dwindle over time and you have the option to sell to cover your losses. This isn’t possible with angel investments.
Long-term - Most angel investment returns don’t come for around five years, but can take up to 10 years. Again, you won’t be able to back out halfway through. Your money is locked in until the company succeeds or fails.
Impact - One feel-good aspect of startup investing is that your money goes directly to small businesses and entrepreneurs. The companies you invest in aren't established giants, they are newcomers. It adds to the fun knowing that you are shaping the futures of real companies in a meaningful way.
Perks - Some companies offer perks to their investors. You can get discounts, access to new products, store credits, and more.
Connection - Investing in startups gets you much closer to the action. You become a part of the startup’s community. You are encouraged to ask questions and work towards the success of the company. For some investors, this is a very rewarding part of the experience.
Ease of Investing In Startups Vs. Public Companies
Most investors know by now how easy it is to invest in stocks through online platforms like Fidelity or TD Ameritrade.
But did you know investing in startups is just as easy?
The secret—Regulation Crowdfunding platforms.
These websites offer a smooth entry into the ultimate wealth-building security type. Angel investing can now be done by anyone, anytime, with very low investment requirements.
Still, misconceptions around angel investing remain. Many seem to think that there is a barrier to entry they can't pass—like a net worth minimum or some legal red tape to navigate.
In reality, startup investing is incredibly straightforward and accessible.
Anyone, regardless of their net worth, can set up a profile on a Regulation Crowdfunding platform and begin investing for as little as $100. You don’t need accreditation and you don’t need to jump through any hoops.
Better yet, startups tend to be easier to understand than stocks.
On a startup’s offering page, there will be details about the product, team, traction, and financials, which are easy to digest and feel quite tangible.
Whether you are an angel investor or a day trader, it can be agreed that startup investments can diversify your portfolio, offer unparalleled return potential, and are now more accessible than ever via Regulation Crowdfunding.