Investing In Startups (aka Gambling With Your Portfolio!)
By now you’ve probably heard of the #getrichslow philosophy that we have members follow at WE.
What you may not know is this has been created entirely based on the experiences that Sarah and I have had when building our own personal wealth.
Everything recommended to members is what we’re either doing now or have done previously ourselves. We have been on this journey for 8+ years so we’re starting to really reap the benefits of the Get Rich Slow philosophy. Now we can take advantage of some more advanced strategies to help accelerate our journey further.
Some WE members who’ve been with us for several years, along with some of our newer, already affluent members, are also at the point where they are ready for some of these strategies. You may have noticed our different membership options which came to fruition because of this: Our Activate, Achieve and Advance memberships.
With our Advance memberships, the important thing to remember is you can’t become a WE advance member until you’re ready!
Like anything, if you try to skip the groundwork you may end up jeopardising your future success.
Whenever we implement a new strategy or investment for ourselves, we share it with you so you can experience our learnings and know that these are potentially options for you in the future.
One of the strategies that we commenced in recent years within our own portfolio is investing in startups. Of course, this is an incredibly risky strategy. We are only using a very small portion of our wealth to do this. It is essentially gambling as some of the investments will completely tank, while (if we’re lucky) some may do extremely well.
Start-up Investments – What are they?
Entrepreneurs often require capital in order to fund their company’s growth until they get into a profitable position or another company acquires them.
In exchange for your investment, you get shares in their company so you can participate in their potential upside.
Here are the pros and cons of investing in early-stage companies:
- Get access to companies that can potentially deliver very high returns
- If successful, can add value to your investment
- Interesting and fun
- Can learn from them to help your own entrepreneurial journeys
- Lack of liquidity
- Potential long investment horizon (your money will be locked away for years)
- Highly risky as statistically most businesses don’t succeed
- Often require follow on money to prevent dilution of your shareholding
- Lots of paperwork required
As you can see, there are plenty of cons! This is why it’s important to only do this with a small part of your overall portfolio and only once you’ve built a really solid financial foundation.
What we have done
Some investments we have made are:
How much should I invest, and what is the best way to access these opportunities?
Due to the high-risk nature of these investments and the potential long timeframe, we have chosen to do most of these investments through our self-managed superannuation fund (SMSF).
We have strict rules that we will only ever have between 5 and 10% of our total asset allocation (referring to a combination of our super and non-super assets) into this type of investment. Sarah and I agree that 5 – 10% was a figure we personally feel comfortable with. And from a #getrichslow perspective, this is generally around the mark we’d want our members to stick with also.
The majority of these investments don’t ever return, even though they all promise the world when you make the investment! So it is very important to participate in a number of them for a chance of picking a winner.
Ideally, building a portfolio of at least 10 startup companies (over time) will give you the diversification you need to sustain the massive losses and hopefully participate in some massive gains too. This means that you need to have an investment pool of roughly $50K – $100K as a starting point. Essentially to even consider including this as a part of your strategy you should really have $1m – $2m in other assets.
Usually, to gain access to these types of investments you need to be classified as a sophisticated investor (income of over $250K per annum, or investable assets of $2.5m), and will require a ‘sophisticated investor certificate’ issued by a qualified accountant.
This is because these investments are unregulated and you, as the investor, are taking on full responsibility for the research and selection of the investments. There is no recourse if things go wrong.
As such, WE are not legally allowed to advise on these types of investments. Where we help is in assisting with building the overall strategy. We then ensure the member sticks within the thresholds they comfortably set themselves.
How to find them?
This is one of the hardest questions to answer as there is no easy way in!
Personally, Sarah and I have three different ways that we gain access to startup investments:
- We are part of a group of very experienced and successful investors who, when they find a deal that they are going to invest in, share it with the group for opinions and also the opportunity to co-invest.
- Being actively involved in the entrepreneurial community globally means we often come across people and companies through our networks.
- We invest in companies that are founded through people who we know and trust.
Obviously, this strategy is not for everyone.
It is up to you to assess whether or not you want to take a risk on a particular investment. Certainly not all of our WEadvance members will even want to do this! It is those with a more aggressive tolerance to risk that investing in early stage companies appeals to.
If you are considering this, it’s important to do as much due diligence as you can on the market opportunity, the company in its current state and in particular, the founder. You can’t take everything they say on face value. It’s important to dig deep and do your own research before committing to anything.
Financial advisers come in handy with helping you to determine where the funding should come from, and in what entity the shares should be held.
Disclaimer: the information contained in the article is of a general nature. It should not be acted upon without seeking the advice of a professional financial adviser.