Why Invest in Startups: Exploring the Upside

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Written By Chris Graebe

Investing in startups is an exciting prospect that offers the potential for high returns and the opportunity to support innovative businesses. 

Key Takeaways

  • Investing in startups offers the potential for high returns, but it’s a high-risk, high-reward strategy that requires careful consideration and due diligence.
  • Diversification is key in startup investing. Equity crowdfunding platforms have made spreading investments across various startups easier, helping mitigate risk.
  • Beyond financial returns, investing in startups supports innovation and entrepreneurship, contributing to developing new products, services, and technologies.

This article explores why individuals invest in startups, discussing the potential for high returns, the importance of diversification, and the role of equity crowdfunding. I also look at the non-financial aspects of startup investing, such as supporting innovation and entrepreneurship.

This is just one aspect of startup investing. To see the full picture, read my article, Understanding Startup Investing.

Understanding Startups

Startups are young companies founded to develop a unique product or service, bring it to market, and make it irresistible and irreplaceable for customers. They are typically technology-oriented and have high growth potential. 

Startups are known for their innovative approaches, and they often aim to fill a gap in the market or address a specific need in a novel way.

Startups differ from traditional small businesses in several ways. 

While a small business operates on established business models and aims to provide a steady income for its owners, startups are built with the intention of rapid growth and scaling.

The goal of a startup is often to bring new, disruptive ideas to the market, gain significant market share, and eventually achieve a lucrative exit through an acquisition or an initial public offering (IPO).

Investing in startups, therefore, is about more than just putting money into a new company. It’s about backing innovative ideas and the teams behind them. It’s about being part of a journey to disrupt industrieschallenge the status quo, and create value on a large scale.

The high-growth, high-reward nature of startups means they also carry a high level of risk. Many startups fail within the first few years, so potential investors must be prepared to risk losing their investment.

Despite this, the potential for sizable returns and the opportunity to support innovation make startup investing attractive.

The Potential for High Returns

One of the most compelling reasons to invest in startups is the potential for high returns. While only some startups will become the next Amazon or Google, those that do succeed often provide their early investors with significant returns on investment.

Consider Peter Thiel, the first outside investor in Facebook. Thiel invested $500,000 in Facebook in 2004. When Facebook went public in 2012, Thiel sold the majority of his shares for over $1 billion. This represents a return on investment of more than 2000x!

Of course, stories like this are the exception rather than the rule. Most startups fail, and investors can lose their entire investment when they do.

However, the potential for high returns is a vital part of what makes startup investing attractive to many investors.

The possibility of high returns is particularly relevant in equity crowdfunding. Because equity crowdfunding allows for smaller investment amounts, it opens up the possibility of investing in a portfolio of startups

This approach, known as portfolio theory, suggests that by spreading investments across multiple startups, investors can mitigate risk and increase their chances of investing in a high-growth startup.

Potential investors should be prepared for the possibility of losing their entire investment and should only invest money they can afford to lose.


Diversification is a fundamental principle of investing. By spreading investments across various assets, investors can mitigate risk and potentially increase returns. Investing in startups can be an effective way to diversify an investment portfolio.

Traditional investment portfolios often consist of a mix of stocks, bonds, and cash. While these assets can provide steady returns, they may not offer the same growth potential as startup investments. By including startup investments in their portfolio, investors can expose themselves to startups’ higher growth potential.

Equity crowdfunding platforms have made it easier than ever to diversify within the startup asset class. These platforms allow investors to spread their investments across a variety of startups.

This can help mitigate the risk associated with startup investing. If one startup fails, the success of another could offset the loss.

While diversification can help, it is not a guarantee against loss. Not all startups are created equal, and a startup’s success can depend on various factors, including the industry, the team, and the market. 

Supporting Innovation and Entrepreneurship

Investing in startups is about more than just financial returns –– it’s about supporting innovation and entrepreneurship. 

By investing in startups, you fund the development of new products, services, and technologies that could potentially change the world.

Startups are at the forefront of innovation. You’re helping provide the capital startups need to develop their ideas and bring them to market.

Consider the impact of startups like Uber and Airbnb. 

These companies have revolutionized their respective industries and changed how we think about transportation and accommodation. Early investors in these companies reaped significant financial rewards and played a part in supporting the innovation that these companies represent.

Startups are typically founded by entrepreneurs – individuals willing to take on risk and work hard to bring their ideas to life. By investing in startups, you’re supporting these entrepreneurs. You’re helping to create an environment where entrepreneurship can thrive.

Equity crowdfunding has made it easier than ever to support innovation and entrepreneurship. These platforms allow anyone to invest in startups, meaning that more people can contribute to the funding of innovative ideas and entrepreneurial ventures.

Equity Crowdfunding as a Path to Startup Investing

Equity crowdfunding has emerged as a popular and accessible method for investing in startups. Unlike traditional routes, which often require significant capital and connections in the industry, equity crowdfunding platforms democratize the process, allowing individuals to invest with smaller amounts of money.

Equity crowdfunding allows investors to directly support businesses and ideas they believe in. This can be particularly appealing for those who wish to back innovative startups that align with their interests or values.

It also provides a unique opportunity for portfolio diversification. By investing small amounts in a range of startups, investors can spread their risk while still maintaining the potential for high returns. It’s a way to have a stake in the ‘next big thing’ without risking a significant portion of your portfolio.

Startups, by their nature, are high-risk high-reward investments. Many startups fail, and when they do, investors can lose all of their invested capital. Potential investors must conduct thorough due diligence and understand the inherent risks before investing.

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