Should You Invest in a Startup?

Are you looking to get into an exciting startup? Despite all the success stories – Facebook, Twitter, etc. – you should know that rarely does a startup make it and reward you with a lot of money. Investing in pre-initial public offering companies involves too great a risk for individual investors.

“Everyone wants to get into the next great deal that the world didn’t see,” said Richard Linhart, senior portfolio management director at Morgan Stanley, at an advisor panel. “Unless you were the wealthy father of Zuckerberg’s roommate, the idea of an individual being able to invest in a successful startup is quite remote.”

The panel, on startup financing and investing, was held recently as part of National Financial Advisor Week in New York’s Times Square. This event, which attracted hundreds of onlookers, featured financial advisors giving tips on personal finance, ranging from retirement saving to college funding. The panels also focused on how people can get the most out of advisors. At the event, Jennifer Rufener of Dover, Ohio, won a sweepstakes for a free college education.

Investing in a startup is different from funding a Kickstarter project, said Mark Herskovitz, senior portfolio manager at BNY Mellon. The money you give to a crowd-funding campaign, like Kickstarter, is more like a donation than an investment.

Herskovitz gave an example of Oculus VR, a company that developed a virtual reality headset called Rift. Oculus raised more than $2 million on Kickstarter, before the founder sold it to Facebook for 1,000 times as much. People who funded Oculus, as promised, got T-shirts and Rifts.

“You may think you are investing in a startup that could be a very hot deal, but make sure you are getting equity in that company, not T-shirts,” he said.

Startups may take years to succeed, if ever, and you cannot take your money out whenever you want. Because of high risks and illiquidity, early stage investing is not for average investors, who, Linhart said, should stick with publicly traded companies to achieve reasonably good returns.

“The forces that help small startups to make it are the same forces that help a publicly traded company to thrive and grow,” he said.

If you are a startup looking for funds, instead of borrowing from friends and family, reaching out to professional investors, such as angel groups and venture capitalists, is a good way to get a reality check, said Brian Model, managing partner of Stonehenge Growth Equity Partners, who moderated the panel.

“There’s a relatively small startup community in New York City,” he said. “Those networks and relationships would really help with the funding process.”

Startups should also take advantage of various government programs that encourage small businesses, such as subsidized incubators and tax credits. StartUp NY, for example, is a program that gives eligible companies access to technology, mentorship and a 10-year tax-free status.

“There are a variety of ways that the state is really trying to engage young businesses,” said Adam Spence, senior vice president for the StartUp NY program, “and give them the skills to thrive.”

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