5 reasons you should consider investing in a startup

5 reasons you should consider investing in a startup

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If you're going to be exposed to market risks, shouldn't you get the highest return possible? Perhaps you should consider adding a startup to your portfolio as part of a diversification strategy.

What other investment could provide a 10x return (or higher) in a few years? That's the equivalent of the Dow hitting 174,000 or waiting a few hundred years in a CD at today's current rates.

So, now is the time for smart investors to think ahead and look beyond the obvious investment options. The Salt Lake/Provo area is a hotbed for startups. Vivint, Fusion I-O, and Overstock.com are just a few examples of local startups that made it big.

There's a thriving market of up and coming companies in the area that may very well turn out to change targeted advertising (a $200B market), defeat cybercrime (a $10B industry issue) or transform sewage treatment with advanced green technologies. Now is a perfect time to reallocate some of your investments and add in a start-up or two with the potential to generate dizzying returns. Here are our top 5 reasons why you should invest in a startup:

1 - Volatility

CDs and money market yields are at historic lows and the stock market at an all-time high. With interest rates near zero percent, they can only go up….and that's not good for the bond or stock markets.

Startups are less impacted by day-to-day market movements. But, if you're willing to lose 25 percent of your portfolio in a market correction, why not "lose" five percent or 10 percent now by investing in a startup which potentially can deliver a 10x or higher return?

2 - Curve

Remember the adage about "buying low and selling high?" By the time the company is in the news, the big gains are gone. The earlier you get in, the lower your buying price will be.

3 - Risk

Granted, startups have higher risk, but anyone remember Enron, Worldcom, etc.? What about Bernie Madoff? Nothing is guaranteed unless it's government backed. So, if you're taking on risk, better maximize the return potential and always diversify.

Startups will generally have a low ($5,000 - $25,000) minimum investment so you can put some of your portfolio into this high risk category without risking everything. If they take off, then your return can be quite handsome.

4 - Dream

Be part of a dream that's coming to fruition. It's like giving birth to something that'll be a positive in the world. Imagine how cool it would have been to be in at Apple, Microsoft or Google at the beginning!

Plus, when was the last time you could call the CEO of one of your investments? You'll be in the middle of it! In addition, you'll help to build local companies, which translates into a more vibrant economy.

5 - Perspective

No day trading here. A startup will force you to plan five or more years out. Typically, investments are not liquid so you can't readily sell them to someone else. The company will need to have some sort of an exit (new investors, IPO or a Strategic Sale) and that usually occurs after they've grown the value, which can take a few years. Think of this as a great retirement investment.

The biggest challenge you'll find is getting to know about new companies, but there are a number of networking groups like CEO Space and SL Circle for budding entrepreneurs.

Not to mention an upcoming seminar about Invest in Startups 101 where you can learn the why, how and what to consider when investing in startups — something you don't want to miss.

Be sure to understand the risks involved and that your investment will be liquid for some time. Since most early stage companies don't survive, be prepared to lose some or all of the principal. Consider it part of the market correction though, but one that actually could give you a great return if it pans out.

Always consult with your financial and tax advisors prior to investing. Just consider though that a five percent investment of your portfolio into a startup could potentially return more than the remaining 95 percent. Just an option (pun intended) to consider.

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