Not withstanding the interminable parroting of the benefits of startups by the leading political establishment, it is arguably one of the most popular and cherished forms of employment in today’s times when the Indian job scenario is rather bleak.
In fact, in the employment rate of the subcontinent (3.52 percent) compared to China and other First World Countries is bleaker than ever. In such circumstances, young minds look forward to novel startup ideas. Yet are startups at all that risk-free?
Risks involved in startup investments
The following are some of the most common risks involved with investing in startups:
Delay in Returns
Already the amount of returns in a startup is highly speculative and least guaranteed. Moreover, a majority of startups usually take not less than five to seven years to generate considerable returns. Additionally, there are liquidity risks too where the investor may find it strenuous to sell his or her securities.
One of the most significant risks associated with startup investment is the risk of dilution. In other words, when startups need to notch up redundant capital in the future, the new investors may receive newly issued securities. Consequently, they may end up diluting the actual ownership percentage the primary investor has had.
Eventually, the investor is likely to face a minority risk. Put simply, as a relatively small shareholder, the concerned investor may be a victim of skewed voting rights and other central responsibilities. In fact, his or her security rights may have to compromise with the preference ratio.
As startups are private enterprises, the valuation remains a rather difficult inference. One might risk overpaying for one’s investment. In that case, the price one shells out for a particular investment may have an adverse impact on the returns.
One of the most fundamental demerits of startups is the problem of disclosures. Being at the nascent stage, the company may not be able to disclose complete info about its plans and business ventures. Additionally, it affects the relationship with other investors as the company may only provide very limited information about its enterprise.
Given the obscurity of almost every startup, it is imperative to consider the aspects of sundry market demands. In fact, it is essential to distinguish between customer demand and broader market demand. The latter is essential for any business to make a mark.
Additionally, the competence of other business ventures selling out preferred items to a wide spectrum of customers may have an adverse impact on the performance of the company. Naturally, the company’s financial and essential material accomplishments may take a back seat.
In certain circumstances, the directors, executive officers, and founders of the company may end up exerting tremendous control over each and every aspect of the company’s functioning. Indeed, the hegemony of such characters may discourage a potential acquirer which in turn might dip the stock price of the company and end up withholding the premium on your investment.
Startups are good choices compared to the more conventional forms of employment. However, in order for one to succeed, it is important to launch an innovative and calculated venture, one that considers each and every subtle detail of market winds and proceeds accordingly.