By Jonny Blausten, Co-founder and CEO at Sprout
Investing in start-ups may appear straightforward, but achieving substantial returns from such investments is tough. Statistics show that a staggering 90% of start-ups fail, leaving amateur investors with low chances of success. In fact, the probability of a start-up becoming a unicorn (valued at $1 billion or more) is a mere 0.00006%. Given these challenging odds, it’s fair to ask if non-professional investors should be angel investing at all.
Understanding angel investment
A typical avenue of startup investment is becoming an angel investor. This involves individuals providing financial support (and sometimes mentorship) to early-stage start-ups in exchange for an equity stake in the company. Angel investors typically invest their own personal money, and their involvement can go beyond just capital investment as they can bring their industry expertise, networks, and business acumen to help the start-up navigate challenges and drive growth.
Drawing from their own experiences, angel investors are often motivated by a passion for a particular company or purpose, rather than purely financial gain. Whilst angel investment plays a vital role in the start-up ecosystem, pursuing this avenue for purely financial reasons can be challenging due to the hours of research required to increase the likelihood of return on investment.
The key to successful investment
To maximise the likelihood of success in direct start-up investments, the key lies in diversification. Instead of placing all your eggs in one basket and hoping to stumble upon the next Uber, it’s far more prudent to diversify your portfolio across 15 to 20 (or more) start-ups. This approach spreads out your risk and increases the chances of identifying high-growth potential opportunities. By allocating your investments across a broader spectrum of start-ups, you significantly improve your odds of generating strong returns.
However, it’s important to consider the financial implications of diversification. If your typical investment size ranges from £10,000 to £500,000, multiplying that by 15 or 20 quickly results in a substantial and potentially unattainable amount. This realisation leads us to explore the benefits of investing in a fund.
Venture capital funds excel at constructing well-diversified portfolios to effectively mitigate risk. These professional funds raise significant capital to invest across 20 to 30 or more start-ups, with some funds even targeting 100+ investments. By building extensive portfolios, these funds aim to provide their investors with the best chance of achieving outsized returns while acknowledging that not every investment will yield exceptional results.
It’s time to consider VC
The advantages of partnering with venture capital funds extend beyond diversification. These funds possess the resources and expertise necessary to navigate the intricate start-up landscape successfully. Armed with specialised technology, extensive networks, and in-house analysts, they can sift through thousands of investment opportunities across various sectors and countries.
This diligent approach enables them to identify start-ups with the highest potential for substantial returns. Additionally, the most promising start-ups often find themselves inundated with interested investors, granting them the luxury of selecting the most advantageous partners. Funds that offer superior access to resources, networks, and other competitive advantages tend to secure these coveted investment opportunities.
By collaborating with venture capital funds, investors significantly enhance their probability of success. The experience and capabilities of these funds position them to discover star performers and seize lucrative investment prospects. Furthermore, the risk profile of investing through a fund may be reduced through their rigorous due diligence processes and focused investment strategies.
Venture capital funds have demonstrated returns of around 35% annualised for over 10 years now. Yet well-established barriers remain between private investors and VC, not least because these funds are primarily accessed by a select group looking to invest significant amounts of capital, as determined by the funds, often in excess of £1m+. That’s why we are breaking down these barriers for underserved investors to access what is recognised as a top-performing asset class.
Unlocking opportunities for underserved investors
The world of start-up investing is filled with challenges and uncertainties. However, by adopting a strategic and diversified approach, investors can increase their chances of achieving substantial returns. Angel investment offers a hands-on approach, with investors providing not just capital but also valuable expertise and mentorship. Diversifying across a portfolio of start-ups minimises risk and maximises the potential for identifying high-growth ventures.
However, partnering with venture capital funds brings numerous advantages, including access to extensive resources, networks, and in-house analysts. These funds excel at constructing well-diversified portfolios and have a proven track record of generating impressive returns. By collaborating with venture capital funds, investors can enhance their probability of success and tap into the top-performing asset class of start-up investing.
As we break down barriers for underserved investors, it’s time to unlock the untapped potential and seize the lucrative opportunities that venture capital can provide.