Start-up investing requires a long-term perspective. When you buy equity in an early-stage start-up, you should assume that it will take at least 5 years before an exit opportunity arises. This could be an acquisition or an IPO. But I would rather have a maximum 10 year expectation to finally cash-out.
An acquisition can take place at any time, but generally speaking, the good ones take at least 2 years, but usually 3 or more to produce a nice return on your investment. It will take a minimum of 5 years until a seed-stage company is large enough to IPO. Acquisitions often return 2X, 5X, 10X or but an IPO is the ultimate goal for start-up investors. If you invest early at the seed-stage in a company, it’s likely you’ll make 50X, 100X or even more on an IPO. This is how venture capitalists and angel investors make their money.
If you invest in a start-up that really takes off like a rocket, you may be able to sell your shares before an IPO on “secondary markets.” But don’t cash out too early. The reason you invest in high-risk, high-reward start-ups is to hit home runs. When you have the potential for a 100X return, let it ride. My advice: Hold great start-ups and resist the urge to sell early. Cash out on an IPO!
A start-up business is an illiquid long-term investment. Nowadays, start-ups stay private as long as possible to avoid the hassles of being a public company. The value proposition for start-ups is also significantly better. By the time a start-up IPOs, most of the gains have already been reaped by private investors. Look at Uber: It IPOs at a USD 120 billion valuation! The bulk of the money has already been made. Public market investors, as usual, are late to the game. Stock markets don’t offer the same type of early opportunities that they used to. That’s why it is important to invest a small portion of your portfolio in promising private start-ups. It’s easy to start building a startup portfolio today, with minimum investments on equity crowdfunding sites of as little as USD 100.
Tip: Create a good-sized, well diversified portfolio. More than 50% of start-ups will fail. That’s to be expected when you invest at such an early point. But those losses can be more than offset by one home run only!
Sven Franssen