Your investment in Start-ups

Investing in a start-up is exciting

Know the risks

Business owners like you, think of diversifying after few years of running your business successfully.

Investing in a start-up can seem really attractive. Putting funds into a start-up can be quite risky, though, so it is important to consider the investment carefully.

Invest in a Start-Up

I am sure you have heard of start-up hub “Blk71″.

The start-up scene is indeed thriving in Singapore, with new companies beginning in start-up hub “Blk71” and accelerators, as well as in homes across the island.

Whether you hear about a start-up from a friend who has a great idea or an online portal, the opportunities are alluring.

More people than ever seem to be considering investing in a start-up.

  • One option for investing is simply to put money into a new business started by a friend, family member or someone else you know. Virtually anyone can invest in a start-up if he or she is introduced to it directly.
  • Another option is to go online to private investment platforms such as Fundnel (, which offer unlisted shares in new or growing companies.

Platforms such as these, however, are usually open only to “accredited investors”, who are defined as people who have more than S$2 million in personal assets or an annual income of least S$300,000. It can thus be difficult to qualify to use such platforms.

  • Another option is to join a group of investors such as the Angel Capital Network or the Business Angel Network of South-east Asia (Bansea).

Organisations such as Bansea provide education and information about investing in start-ups, introduce members to start-ups to invest in, and provide networking opportunities.

Risks involved in Start-Up

Investing in start-ups can indeed be lucrative. In the long run, selected and managed portfolios of personal angel investments produce an average annual return of more than 25 per cent (David Rose).

Mr Rose also noted, however, that a large majority of self-proclaimed angel investors actually lose money. A key reason, explained the Angel Capital Network, is that investing in early-stage companies is risky.

Out of every 10 angel investments, it said, 5 businesses fail and 3 more bring only a modest return.

Just one or two investments out of 10 provide most of the returns, although investors can sometimes receive as much as 10 to 30 times the value of their initial investment on these successes.

Other experts estimate that 80 to 90 per cent of start-ups fail. Even when start-ups do succeed, it can take five to 10 years before you get your money back.

Before even considering investing in start-ups, then, it is essential to figure out whether you can accept such risks.

For example, if you would be financially strapped if you lose the money you put into a start-up or if you are risk-averse, it is better to stick to traditional investments rather than investing in start-ups that have more than a 50 per cent chance of failing.

Before you take a plunge, ….

If you do decide to invest in a start-up, it is important to develop a plan and follow it.

The first step is to figure out how much to invest.

Many start-ups require minimum investments of S$25,000 to S$50,000, or more. Given the high failure rate, experts advise investing in at least five to 10 start-ups rather than just one.

Even if your friend has a fantastic idea, she/he is more likely to fail than to succeed and you may be better off investing in several start-ups rather than just one.

You should decide on the total amount you will invest and how much you are willing to put into each company. Some experts advise not investing more than 10% of your assets in start-ups.

It is also helpful to figure out why you are investing. If it is purely for a financial return, a hard-nosed business approach is preferable.

On the other hand, if you are investing to have a positive impact on the community or lend your expertise to a new business or help a friend — and if you can afford to lose money — your approach may be different.

Next, you should analyze the company so you can figure out whether to invest.

This means talking with the founders to find out details about their expertise, team dynamics, the product or service, potential customers, marketing plans, competition, financial resources, revenue and other factors that will enable them to succeed.

You should also figure out the firm’s “exit strategy” for making money, so you know how you will make money. While owning part of a fast-growing business is exciting, you will usually get your money back only if the company lists shares publicly in an initial public offering or is sold to another company.

It is also important to review the terms of the deal in the shareholder agreement to figure out what you will own, how it is structured and whether your ownership rights are protected.

An “anti-dilution” clause, for example, can help maintain your ownership percentage.

Making the investment

Investing in a start-up can offer a great opportunity.

A fundamental principle, though, is to expect risk and not to invest more than you can afford to lose.

If you do decide to invest, take the time to understand the start-up and then enjoy the ride.

From time to time, Pathfinders advise entrprenuers on investing in Start-ups.


Suresh Shah, Pathfinders Enterprise


Comments are closed.