Why Invest in Startups?

startup investment, know how, why invest in startups
Ronald Rapberger

Ronald Rapberger

(Investment Director)

"We see different reasons why investors invest in the asset class Startups. In the following, I want to give you an understanding of some of them and provide more information about startup investments"

startup investment, know how, why invest in startups

What can I expect from Startup investments?

Startup investments are a high-risk asset class with a high-return potential, where one surely does not become rich overnight. However, in the last years, a clear trend to Startup Investments is recognizable.

How long will I wait until I can see returns?

It is not uncommon for startup investors to hold certain positions for up to 10 years (the average being 6 -7 years), and it is important to note that unlike most investments in the public market, you do not choose when to liquidate your position. Only in the course of a so-called Liquidity Event (Exit, IPO, trade/asset sale or also a sale to other investors) startup investors can sell their shares. Therefore, make sure that the funds you provide for risk investments will not be needed in the near future.

Access to the asset class “startup investments”

The venture capital asset class has typically been accessible only for institutional investors (banks, insurance companies, pension funds, etc.) and wealthy private individuals (HNWIs, Family offices) with considerable funds at their disposal. This was driven by the minimum investments amounts starting in the single-digit millions. This has quite naturally made startup investments unattainable for many private investors. primeCROWD is addressing that issue by lowering the investment threshold to €10,000, thereby opening the market to a wider range of investors.

In the current low-interest climate, investors are desperately looking for yield

The European Central Bank is continuing its negative interest-rate policy and the central bank rate has been stagnating at 0% for almost 4 years (starting March 2016), with no increase currently on the horizon. This trend is mirrored in Austrian government bonds which exhibit negative interest yields for up to 10 years duration, turning only marginally positive for durations beyond that tenor.

As a consequence, investors are increasingly shifting their portfolio allocations in the constant hunt for yields. Clearly, the opportunity for high returns is an important reason to invest in startups. Investors who take a bigger risk at an early stage also expect a correspondingly high return.

Startup investments are enjoying increasing popularity among investors

On top of financing the future (and potentially the next “big thing”), startups investments as an asset class can provide attractive returns in an investment climate of diminishing yields. Startup investments have historically enjoyed low/moderate correlations with other asset classes, including traded equities. Although startup investments are inherently more risky than stocks/bonds, allocating a certain portfolio portion towards this asset class may actually have a de-risking effect. Additionally, investing in startups also means investing in the future. The startup founders need growth capital to turn their ideas into reality and if investors can achieve attractive returns with this type of venture capital, both parties benefit.

Startup investors are close to entrepreneurship

Investments in startups promote entrepreneurship. When an investor invests in a company at an early stage, he experiences what needs to be considered for running a company. Those investors also learn what a business plan looks like, which components belong to it or how to create a target group. In this way, the investor experiences which new technologies and future industries with growth potential are currently emerging and can help to advance this area.

→ Startup investments can generate returns but also exhibit the potential of creating completely new industries that have an impact on society!