April 23, 2024
Investment

Your Questions Answered: What are the returns and risks associated with startups and private equity investments?


Q. I’m Ranjana, an entrepreneur. I’m planning to invest in startups and private equity. What are the potential returns and risks associated with these investments? How can I get started in this asset class?

Investing in startups and private equity can offer the potential for high returns, but it also comes with substantial risks.

Potential benefits

High returns: If you invest in a successful startup, your investment can grow significantly over time, often outpacing traditional investments.

Influence and involvement: You may have the opportunity to actively participate in the growth and development of the companies you invest in. This can be rewarding both financially and professionally.

Risks

Inherent risk: Given the inherent risk in starting something new, many startups fail. There’s a high probability that you may lose your entire investment.

Illiquidity: Private equity investments are typically illiquid. You may not be able to sell your investment or realise gains for an extended period, often several years.

Lack of diversification: While private equity offers diversification benefits, it can also lead to concentration risk if a significant portion of your portfolio is invested in a single startup or a small number of companies.

Due diligence: It can be challenging to thoroughly evaluate the potential of a startup or private equity investment. You need to conduct extensive due diligence to assess the company’s business model, management team, market opportunities, and financials.

To get started you may explore various investment structures, such as venture capital funds, private equity funds, and direct investments, and determine which aligns best with your goals and risk tolerance. Review the product thoroughly before going ahead with the investment.

Ranjana, as you are an entrepreneur, ensures that the startup you invest in operates in an industry different from yours. This will help you achieve better diversification.

International Money Matters Pvt Ltd is a 22-year-old SEBI registered financial planning-cum-investment advisory boutique. Please click here to find out more.

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