Out of the frying pan and into the fire… is an old saying for getting out of a bad situation only to find yourself in a worse one. For investors fleeing Wall Street, they’re just going from one kind of hype to another – often with the same results.
For investors fleeing Wall Street for alternative investments, many are drawn to the “sexy” world of startups. With the proliferation of sites like angellist.com, investors are drawn into the world of early-stage, angel investing, and venture capital. Everyone wants to be on the ground floor of the next Google, Facebook, or Amazon. The startup bug has also bitten my friends and colleagues who want to get in on the action.
The buzz around startup investing can be attributed mainly in part due to the lifting by the SEC of the ban on advertising and solicitation in connection with certain private offerings. And today’s entrepreneurs are taking full advantage.
The modern capital seeker is sophisticated. They know the buzzwords that will hook investors. They’ll tout green investments, making a difference, being on the cutting edge, and it’s working. According to Bloomberg, in 2021, startups raised around $621 Billion, shattering funding records.
There’s no doubt that startup funding plays a crucial role in our economy and culture. It fuels innovation and progress. Without it, we wouldn’t have the tech that we depend on daily to communicate, work, do online shopping, get around town, and search the internet.
Seed capital is important, but is it good for all investors? What type of investor is startup investing suited for? Sure there’s some sex appeal to say you’re an angel investor or you’re involved in venture capital or private equity, but does it pay? Who is startup investing really geared towards?
I’d say an investor who has already made their millions and can afford to roll the dice on an unproven product or service. For the rest of the investing crowd, startups may not be the way to go.
Here are the sobering statistics:
The most common statistic often associated with startups is that 90% fail. Is it true? According to some data and research, nobody knows exactly where the number comes from, but that failure percentage is probably pretty close.
According to one researcher, the failure rate is at least 75%. Based on his research, Shikhar Ghosh (2012) of Harvard states that 3 out of 4 VC-backed businesses fail. But VC-backed businesses aren’t the only startups. Many startups fail before even getting to the VC stage. Ghosh’s failure stats only include startups that VCs have invested in. These companies are usually past the ideation phase and are in their growth phase – companies referred to as scale-ups in the startup industry.
For all the companies that get to the scale-up phase, many companies don’t even get out of the ideation phase. Many of these companies likely received angel investing, so when you combine the VC-backed startups with the angel-backed startups that fail, the failure rate is probably close to the 90% rate often thrown around. The remaining 10% are just the ones that don’t fail. It doesn’t mean they’re super successful. Among all startups, companies that consider the unicorn status of a $1B+ valuation to be a success are exceedingly rare, at 0.00006. Only a fraction of a percent of all startups makes it to this tier.
Investors who leave the “look at me” world of meme stock or crypto investing often fall for the same traps in the “look at me” world of startup investing – often with the same losing money results.
Maybe it’s time to pause and ask yourself why you invest the way you do? Why are you investing? What’s your motivation? Are you investing for status or for the prestige of having the label of being an angel investor, shark, or VC? If so, are you real with yourself about the reality of startup investing?
It’s a gamble. The data, numbers, and odds are against you. Why not invest in something where the odds are stacked in your favor?
Suppose you’re a person who follows the numbers, who values data and metrics. Why not invest in companies and assets that have a strong record of being profitable and that have the confidence to offer you consistent periodic distributions? While not on the same sexy level as an angel or VC investing, you can count on consistent and reliable returns for building wealth with tried and true investments.
The past is a pretty good predictor of the future – especially when it comes to the probability of success of startups, which is razor-thin. On the flip side, the track record of certain industries and even operational companies can also be reliable predictors of future success.
If you focus on data and returns, maybe one day you’ll have a large pile of stupid money you could afford to throw at startups to see what sticks. In the meantime, avoid investing for status and focus on the metrics.
Kyle Jones is a co-founder and Key Principal of TruePoint Capital, LLC. Kyle is responsible for the company’s strategic planning, investment decisions, asset management, and overseeing all aspects of the company’s financial activities, operations, and investor relations.
Kyle obtained a Bachelor of Science degree from Texas State University – San Marcos, where he also played Division 1 Baseball.