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The Pros and Cons of Investing in Startups

A lot of the value of a successful company may be created during the rapid-growth period before it goes public or is bought by a larger business.

Startup Investing Opens Up to Everyone

Investing in startups is now easier than ever. You don't have to invest a lot or have the right connections. Instead, you can buy a small slice of an emerging business through peer-to-peer networks (such as crowdfunding sites). The process is simple, and you can invest relatively small sums of money.

An alternative is angel investing. High-net-worth individuals can invest their own capital in a startup. Or they can join an angel investors club to pool their money to fund startups. This is a more complex process and requires a larger upfront investment. An individual might invest $5,000 to $150,0006 at a time, while a small syndicate of three to five angel investors might pour $100,000 to $250,000 into a startup.6

What Are the Risks of Investing in Startups?

There are many risks when you invest in startups. If you're going to dabble in this space, you need to be realistic and not commit any capital you can't afford to lose. The failure rate is high, so you could lose your entire investment if a business goes bust.

Here are some other things that make investing in startups riskier:

  • Detailed information isn't as widely available
    Because the business you'll be investing in will still be privately-owned, it won't be subject to the same rigorous reporting standards as a publicly-listed company. This means you'll have access to less information about the company and its financial health. This can make it difficult to know when or whether to invest. It also means you may find it harder to assess if the company is being correctly valued.
  • Longer time horizon
    You should be prepared for your money to be tied up for at least three to five years. You may not see a return on your investment for even longer, if you ever do. Startup capital must be patient capital, and come with low expectations.
  • Harder to get your money back
    Investing in startups is an illiquid way to invest. If you change your mind about your investment or find you need the cash sooner, it can be difficult to get your money back. While you may be able to sell your stake on the secondary market, there are no guarantees that you'll get your initial outlay back, or even that you'll be able to sell at all.

While new ventures are an exciting and dynamic area in which to invest, they aren't suitable for everyone. Think carefully about your appetite for risk and your tolerance for loss before you commit capital to a startup business, however promising it may look. Talk with your Synovus financial advisor to be sure you have thought through the details.

Important disclosure information

This content is general in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.

  1. Bureau of Labor Statistics, "Survival of private sector establishmentsby opening year," accessed June 14, 2022. Back
  2. Teare, Gene, "Global Venture Funding and Unicorn Creation in 2021 Shattered All Records," Crunchbase News. Published Jan 5 2022, accessed June 14, 2022. Back
  3. CBInsights.com, "The Complete List of Unicorn Companies," accessed June 14, 2022. Back
  4. Zainab Hussain, Noor and Franklin, Joshua, "Airbnb Valuation Surges Past $100 billion in Biggest U.S. IPO of 2020," Reuters. Published December 10, 2020, accessed June 14, 2022. Back
  5. Bizoutai-Kennedy, Yael, "SpaceX Could Hit $127bn Valuation WithNew Round of Funding," Yahoo! Finance. Published May 23 2022, accessed June 14, 2022. Back
  6. Harbott, Arif, "The Ultimate Guide to Angel Investing," Harbott.com. Published September 17, 2020, accessed June 14, 2022. Back