The potential to grow the next Apple or Netflix can be a dizzying prospect, but investing in startups isn’t without its pitfalls. Here’s how to invest in startups – including in partnership with the Singapore government.
Investing in startups is one of the most exciting ways to put your money to work for you, given the potential for funding the next big thing.
It is also rewarding in ways few others can match, as you will be helping to create jobs while contributing towards the advancement of the industry or segment your investments are operating within.
On the flip side, investing in startups isn’t without its drawbacks – and it certainly isn’t for the faint of heart. In this article, we will take a look at what investing in startups really entails, and three ways to invest in startups in Singapore.
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Pros and cons to expect when investing in startups
Pros of investing in startups
1. Potential for outsized returns
One of the best examples of startups furnishing mind-boggling returns is WhatsApp, which was backed in its early years by venture capital firm Sequoia Capital.
After investing US$60 million in WhatsApp, Sequoia sold the messaging app to Meta for a whopping US$19 billion. The deal made the value of Sequioa’s stake in Whatsapp balloon to US$3 billion – for a cool 50x return on investment.
Of course, such lofty returns are the exception rather than the norm.
But investing in startups has been proven to offer a path to higher returns.
According to research firm Cambridge Associates latest benchmark report, between 2012 and 2022, venture capital scored annualised returns of 19.19% vs the MSCI World Index’s 7.79%; the Russell 2000’s 9.03% and the NASDAQ’s 15.04%.
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2. Portfolio diversification
Investments in startups can help to diversify an investment portfolio beyond common assets like stocks, bonds and mutual funds. Their potential for high returns can hedge against downturns in the larger market, helping to shore up the value of your portfolio.
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3. Large range of choices and options
Investors can choose from a large variety of different startups to invest in, from across a multitude of sectors, regions, products and services.
This further increases the potential for startup investing to diversify a portfolio, while also making it easy to find startups that are in alignment with your preferences, goals and beliefs.
In this way, investing in startups can be a way for you to contribute towards causes you want to support.
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Cons of investing in startups
1. High levels of risk
Investing in startups can be lucrative, but also comes with a commensurate level of risk. Recent statistics are bad enough to give anyone pause.
On a global scale, startups face a failure rate as high as 90%, with as many as 2 in 10 new businesses shuttering within the first year of operations.
The failure rate among venture-backed startups isn't much more reassuring, with an estimated failure rate of 75%.
Clearly, startup investing isn’t something to be taken on a whim – and you definitely shouldn’t go betting the entire farm on the first startup you encounter.
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2. Valuation can be tricky
By their very nature, startups are unproven in the market.
Therefore, how does one reliably gauge how much a startup should be worth?
Well, your guess is as good as Mr Wonderful’s from Shark Tank. Ok maybe Kevin O’Leary has a more educated guess from his decades of experience, but it’s still just that – a guess.
It sounds insane but the valuation of a startup largely depends on what a would-be buyer can be convinced to think it is worth.
Sure, there are projections and numbers and data to be crunched that can offer a hint, but beyond that it’s like trying to predict the future.
This means that one of the biggest risks of investing in startups is over-valuing what a business (or in many cases, a business idea) is worth, and paying too much money for it – money that you may never see again, much less turn a profit for you.
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3. Illiquidity in the short term
Investing in startups involves a significant time commitment, as it may be quite some time before you see any returns on your investment.
Unlike money used to purchase stocks, funds put into a business startup cannot be freely withdrawn whenever you feel like it, as the money would have gone to pay salaries or other expenses, or to purchase equipment or inventory.
Instead, you’ll have to wait for an exit opportunity (such as a buyout or the company going public), or sell your stake to someone else – likely at a loss.
All these mean that startup investors will have to accept a high degree of illiquidity, especially in the short term.
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Three ways to invest in startups in Singapore
1. Angel investing
Angel investing is when an investor or group of investors inject capital into a startup to help it grow and develop. There are several online platforms in Singapore dedicated to helping match startups to angel investors, where you can browse for suitable projects to invest in.
You will need to sign up to be an investor on the platforms you choose, and different platforms have different minimum investment amounts and eligibility requirements. Furthermore, some angel investing platforms focus on startups at particular stages, such as pre-IPO.
Some popular angel investing platforms include:
2. Startup SG Equity
If you prefer to invest only in Singapore-based startups, consider joining Startup SG Equity, a start-up investment matching programme by Enterprise Singapore.
What’s unique about this platform is that projects are pre-screened for key business attributes, and private investors are invited to co-invest with the Singapore government into eligible startups.
This may make for a more attractive alternative for investors who want to lessen their investment risk or who want another layer of professionally executed due diligence.
3. Peer-to-peer lending
A third option to invest in startups is to participate in peer-to-peer lending. This is similar to angel investing, but generally has less strict eligibility criteria, such as not having to have accredited investor status.
Peer-to-peer lending can offer compelling returns and shorter time frames, as loan tenures tend to be in the shorter range.
However, peer-to-peer lending does not restrict itself only to startups, and instead serves a more general audience. Hence you will come across businesses at any stage seeking funding for any number of needs, and not just solely for startup growth.
Some popular peer-to-peer lending platforms in Singapore are:
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