How High-Return Startup Investments can Make You RICH!
Hey Bow Tie Nation, Joseph Hogue here with the Let’s Talk Money channel and a very important topic for you today. You know I love talking stocks but what most investors don’t realize is you will NEVER get rich investing in stocks.
I want you to take a look at this table, its from a survey of 2,500 millionaires by BNP Wealth Management, showing the percentage of their wealth in certain assets.
And look at that left column, the average millionaire has less than 20% of their money in stocks, just 17% in stocks versus these other assets.
Nation, the rich aren’t that way because they invested in the stock market.
Now I know a lot of you don’t have the time or just don’t want the stress of starting your own business so what I want to talk about in this video is the next best thing and actually accounts for about 10% of the portfolio for wealthy investors.
Not only will I show you how you can get a return on startup investments that’s nearly four-times what you get in stocks, I’ll reveal how investing in startup companies will help you take the risk out of your portfolio and three tips to making as much as possible in these investments.
It’s part of three-video series in partnership with the Republic platform on how to invest in startups. Republic is part of the crowdfunding revolution, enabling anyone to become an angel investor.
What I like about Republic is their venture capital-approach to researching companies. I spent a good part of my professional career as a venture capital analyst and love getting back into this idea of looking at early-stage companies, analyzing the business model and market to find those startup investments with a three- and 5X return.
Republic has one of the lowest acceptance rates for projects, just 1% of submitted deals are approved for investment.
What is Equity Crowdfunding Investing?
At its most basic here, investing in startups is buying an ownership investment in a company before it issues stock in the public markets. Sometimes called angel investing, it’s this early-stage funding for new companies that helps it grow to the point where it can sell shares in an IPO or attract a buyout from a larger company.
Pros and Cons of Startup Investing
Pros of this type of investing are the higher potential returns, and I’ll show you a study next that found an average of 27% annual returns for angel investors. You also get critical diversification from the roller-coaster ride of stocks and a sense of pride that you helped make the next Twitter or Uber work before other investors.
Understand it’s not all rainbows and unicorns though. Cons are that your money is usually locked up for at least a year or more while that company grows. A survey of angel investors found the average investment took five years to pay off and more than half the companies you invest in may return less than you put in.
Average Startup Investing Returns
We’ll talk more about these pros and cons of startup investing. Probably the best study that explains all this is this one by Willamette University. This was a survey of 538 angel investors covering over 3,000 investments in early-stage companies.
The study found an average holding period of 3.5 years and angels had an average of 10 investments in startup companies. And the findings on return are really interesting and actually descriptive of this type of investment.
Over that 3.5 year holding period, angel investors averaged a 27% annual rate of return for about 2.6-times their money. But look at the breakdown of returns for any single investment and you really see what startup investing is all about.
Just over half of these investments return less than 1X, so less than the money you put in and in fact, about 35% returned nothing.
Nation, that’s the risk in these high-return investments. We’ve all seen the failure rates for small businesses, not many grow to become the next Google or Microsoft.
I’ll show you how to research these startup companies to make sure you’re investing in the best but look at the returns on the other half of the portfolio. In that study of 3,000 angel investments, about one-in-ten returned five to 30-times your money! And one-in-twenty, around 5% of the portfolio investments returned over 30-times the investor’s money!
Examples of Successful Angel Investors
That’s the power of startup investing here folks. When you win, you win BIG!
Peter Thiel was one of the first outside investors in Facebook in 2004. Thiel invested $500,000 for about a 10% stake in the company and made over $2 billion when the company went public in its 2012 IPO…that’s like turning a thousand dollars into four million!
Mike Markula became the first investor in Apple in 1977 with a $250,000 check that gave him a third of the company. Just three years later when Apple issued public stock, he made $203 million or a 900% annual return on his money.
How to Invest in Startup Companies
Now it used to be regular investors couldn’t get in on this type of startup investment. The Securities Act of 1933 locked out regular investors by saying that only accredited investors, the people with a million dollars net worth or a certain level of income could invest in startup companies.
The JOBS Act of 2012 opened up this world and allowed equity crowdfunding sites like Republic to connect startup companies with investors.
So besides the potential for that 27% annualized return, startup investing also offers some great diversification benefits for your portfolio. 2020 has been a prime example of just how volatile the market can be, crashing 35% before rebounding more than 40%, but a lot of investors haven’t benefited from the rebound. They sold out in panic as the market was falling and waited too long to get back in.
By being locked into that startup investment, you’re not going to be trading in and out of your early-stage companies. You’ve got that forced discipline to ride out an investment and see just how far it can go.
Three Rules to Investing in Startups
Now I want to share three tips for investing in startup companies, three critical rules I learned as a venture capital analyst that will help you make money.
First here is you have to do your homework. This means looking into each investment, analyzing the financials, the market and only investing in the very best. Every second you spend here will pay off. The researchers at Willamette found the average angel investor spent about 20 hours analyzing each deal, and we see their returns in red here.
For 26% of the deals though, where the investor spent 40 hours or more in due diligence, that analysis, they got an average 5.9X return. Look at the blue bars, the high analysis results, fewer unprofitable investments and more that produced those five-, ten- and 30X returns.
The Republic platform helps with its own due diligence into every investment on the site but you need to dig in here and spend some time as well.
Second is invest in a portfolio of companies, at least five to ten startups. Remember that returns survey. Any single investment has about a 50/50 chance of being a flop but invest in a group of companies and you’ll get enough of those winners that average your total return to that 27% IRR we see in the survey.
Third here is just understand what these investments are. Startup investments are long-term and high risk. That means don’t stress about the short-term because you’re locked in anyway. Don’t get frustrated when one investment flops because it’s going to happen. Invest between ten- to 20% of your money in a group of companies and get those high portfolio returns.
I’ll show you a few of the actual start up investments on Republic, how to analyze them and how to invest in the next two videos. Check out Republic with the link above and get started investing in startups now.