Why Invest in Startups Apart from Traditional Investments

Investing in startups has become a hot topic in the financial world, offering exciting opportunities for investors looking to diversify their portfolios. With the potential for high returns and the chance to support innovative ideas, startup investments are attracting more attention than ever.

According to recent data from Inc42, startup funding in India crossed $1.5 billion in H1 2024, showing a 15% increase from the previous quarter. Indian startups have demonstrated an exponential growth trajectory, achieving their first $50 billion in funding over five years. However, the pace of investment has accelerated dramatically, with the next $50 billion coming in just three years and the following $50 billion in a mere two years.

When you invest in startups, you’re not just putting your money into a company; you’re backing the next wave of innovation and entrepreneurship — You’re betting on the possibility of substantial financial gains. This potential for high returns is what attracts many investors to the startup ecosystem.

Why can startups offer such lucrative opportunities?

Early Stage Growth — Exponential Value Increase

Startups in their early stages focus on developing their product, building a customer base, and establishing a strong cash flow. During this time, startups are highly adaptable and receptive to change, which allows them to pivot quickly in response to market demands.

Investing at this stage can be risky, but it also offers the highest potential for returns. As startups gain traction and prove their concept, each subsequent round of funding typically comes at a higher valuation, potentially multiplying the value of early investments.

As an early investor, you get in on the ground floor, potentially acquiring a larger stake in the company for a lower initial investment. According to an Inc42 report, in the seed stage, startups have secured over $7 billion in funding with a strong 3-year compound annual growth rate (CAGR) of 19%, and 5.2K+ deals between 2020 and 2023. This stage not only provides a low entry point but also offers the potential for exponential growth as the startup progresses.

If the startup succeeds, your investment could grow significantly as the company expands, as shown by the growth and late stages that cumulatively attracted over $142 billion in funding. While growth-stage startups experienced a 13% CAGR with $37 billion in funding, late-stage investments faced a decline with a -16% CAGR, emphasising the importance of early-stage investments where positive growth rates are more common.

For example, a startup that begins with just two customers could theoretically grow to over a million users in just 20 cycles of doubling its user base. This compounding effect can lead to remarkable returns for early investors who have the patience and foresight to stick with promising startups through their growth phases.

IPO and Other Opportunities

The ultimate goal for many startup investors is to see the company go public through an Initial Public Offering (IPO) or to be acquired by a larger corporation, apart from rising to the top as a unicorn. These events often result in significant paydays for early investors.

This year, 10 new-age tech companies have listed on the exchanges so far whereas just five startups listed in the entirety of 2023 and three in 2022. But what is encouraging startups to revive their IPO plans just a year after many were shelved or delayed? The key drivers are the easing of the funding winter, a renewed focus on profitability and increasing investor interest in startup IPOs.

An IPO allows a startup to list its shares on a public stock exchange, providing liquidity for early investors and potentially driving up the value of their holdings. The process requires extensive preparation and timing, but a successful IPO can yield returns in the thousands of percent for early backers.

Uncorrelated Asset Class

Startup investments often behave differently from traditional asset classes like stocks and bonds. This lack of correlation with public markets is one of the primary benefits of investing in alternative assets. The projected growth of the Indian tech startup ecosystem from 70K startups in 2024 to 1.8 lakh by 2030 presents unprecedented investment opportunities. When you include startups in your portfolio, you’re adding an investment that has little or no correlation to traditional assets.

This means that the performance of your startup investments is largely independent of broader market fluctuations. During market downturns, when stocks and bonds might be struggling, your startup investments could potentially hold steady or even thrive. This can help reduce overall portfolio volatility and risk.

Exposure to Innovation

By investing in startups, you gain exposure to innovative ideas, disruptive technologies, and emerging sectors. Startups are often at the forefront of technological advancements, driving innovation in areas such as artificial intelligence, blockchain, biotechnology and renewable energy.

This exposure to cutting-edge technologies and business models can position your portfolio to benefit from future trends and advancements shaping the global economy. It allows you to participate in the early stages of potentially transformative companies, which can lead to significant returns if these startups succeed and become industry disruptors.

Social Impact Potential

Many startups are not just focused on financial returns but also on creating positive social impact. By investing in these companies, you have the opportunity to support ventures that address pressing societal challenges in areas like healthcare, education and environmental sustainability — something that makes you feel proud apart from being wealthy.

Understanding the Risks

While investing in startups can be exciting and potentially lucrative, it’s crucial to understand the risks involved. Startup investments come with high levels of uncertainty and volatility, and investors need to be aware of the potential pitfalls before committing their capital.

Investing in startups has the potential to revolutionise your investment strategy, offering a unique blend of high-risk, high-reward opportunities. If you’re ready to explore the world of startup investing, consider using a trusted platform like Creddinv, where you can connect with innovative startups and make informed investment decisions. Seek professional financial advice, evaluate your risk appetite and take the first step toward transforming your investment strategy.