Top risks and rewards from investing in start ups


Date: 19 November 2020

An entrepreneur stakes up piles of coins

Investing in start ups can be very risky. It can take a long time for your investment to pay off but just a few seconds to lose all your hard-earned cash.

There are a number of reasons why some start ups are not successful. These can include a lack of funds, poor business strategies, fluctuating markets, fewer conversions, and many more.

Bear in mind that risk and reward go hand-in-hand in start up businesses. If you don't take risks, you will not be able to learn from your mistakes. You should only risk as much as you can afford to lose.

To become a good investor, you must keep your eye on the market because it fluctuates constantly, and it can affect your business and the value of any business you have invested in too.

The risks of investing in start ups

You must carefully consider the risk associated with investing in start ups before committing time, resources and money. Business failure rates are high amongst start ups so ask yourself if you are prepared to take that risk before you invest in a start up company.

We outline the top risks below.

1. Unpredictable failures

Even the most trusted of start ups can fail for a number of unforeseen reasons. One of the main reasons many fail is a lack of funds. Some businesses require substantial sums of money to get off the ground. You need to be prepared to commit sizeable funds before you get a return on your investment. Lack of communication and poor business strategies are other common reasons for the downfall of many businesses.

To get a sizeable return on your investment, you will need to commit a sizeable sum in the first place. Higher returns are often also accompanied by greater risks. You can get a clearer idea of the risks and rewards at

2. Fraud and failure risks

You could lose your entire investment if the business trades fraudulently or as a result of malpractice or misconduct. Investing in start ups with people don't know very well increases the risks.

Another consideration is that the rate of start up business failures is huge (ONS statistics reveal that only 68.3% of businesses started in 2016 were still in business two years later). You must consider this before investing in start up companies. You must keep track of your investments because start up companies often fail.

3. Security risks

Security risks can be broken down into four categories: valuation risk, minority stake, dilution, and instrument risk. Before investing, you must take your time to understand the nature of the securities that you are investing in.

4. Investment risks

Once you invest in start ups, your entire investment amount is at risk until you realise a return on your return investment. The fortunes of small businesses can rise and fall rapidly and you have no control over that. 

Moreover, liquidity is a top risk associated with start up investments. Most start ups can take longer to generate a return on your investment.

The rewards from investing in start ups

Now, let's discuss some of the rewards of investing in start ups that can make your investment decision clearer.

1. Creates more jobs through your investment

If your start up company succeeds, it can create jobs and decrease unemployment in the surrounding area. This is one of the biggest rewards from investing in a successful start up. Not only do you get a financial return on investment, the local economy and population benefit too

2. Many start ups require minimal funds

If the start up doesn't require much funding, this could be an attractive business opportunity for you to invest in. For one thing, very few funds are at risk, and if it succeeds, it should give you a good return on investment.

If you are new to investing, starting by investing smaller amounts constitutes a much lower risk.

3. More investment opportunities

The vast majority of businesses in the UK are small businesses. This means there are many companies out there looking for investment. This offers you a lot of opportunities to invest and earn a return. Note that established businesses tend to only offer shares to investors. Therefore, if you get a chance to invest in a start up you should take it as a long-term investment opportunity.

Final thoughts

There are both risks and rewards associated with investing in start ups. This doesn’t mean you shouldn't consider the opportunity - nothing is completely risk free. Before making any investment, carry out thorough research and make sure your concept is clear.

Copyright 2020. Featured post made possible by Thomas Carey

What does the * mean?

If a link has a * this means it is an affiliate link. To find out more, see our FAQs.