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Investments Startup

IPOs vs Startup Investments for Middle-Class Folks

Everyone wants to have a chance to invest in the next Google, Facebook, or Coinbase. The success stories of these billion-dollar companies that we see in the media are driving more and more personal investors (I am talking about working middle-class folks – not professional fund managers) to place bets (startups investments) via various crowdsourcing platforms.

I say “bet” because this is a bet, not an investment, they just don’t realize yet.

I wonder how many people understand the term sheet and risk involved with their startup investment? Do they know that even in the case of a successful exit they will probably have to wait for about 10 years for their cash-out? Do they know that the average IRR of a VC fund is about 25% per year? Do they know what an IRR is? Do they know that a fund needs to invest in hundreds of startups to make that math (25% IRR) work?

I would say that most don’t know many of the above. They just follow the herd.

But let’s say you do know about all of the above and you do realize that your chances of hitting gold with crowdfunding are practically zero. Would you still do it or would you prefer to invest a part of your money in recent IPOs (in their first year on the public markets)?

Obviously, a publicly listed company (I am not talking about SPACs) has been validated by the markets and has a lower risk when compared to a new startup.

The low risk also implies a lower return. You might get a better return than the average 10% of the S&P, but you will never get a 100x return either (unless you buy the next Tesla – again, kind of zero chances of hitting this gold mine). But you could get a 15% or 20% year of year.

That is close to the average IRR of VC funds. In 10 years you might win 3 to 5 times what you invested, or you might lose it. Remember the risk is not zero. But from my perspective crowdfunding also has practically zero chances of giving you a return. A middle-class individual simply doesn’t have enough capital to diversify to make crowdfunding works nor does it have the access to the best startups (VC funds always fight over investment opportunities – you just don’t notice it).

If you want to own stock at a startup, don’t invest via crowdfunding. Just go work for that startup, most of them offer equity on top of the base salary. This is another topic that can be debated, but I will leave it out for now.

So what do you prefer? Startup Investments via crowdfunding or buying recent IPOs? I would go for IPOs, but hey, this is just my personal opinion. I am not a financial guru or an experienced investor so double-check everything I said, I might miss something.

Do you know anyone that hit a gold mine startup via crowdfunding investing?

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