Shalom Lamm, the West New York Real Estate Developer is often asked by friends and acquaintances about investing in startups. Time and time again Lamm replies that people should only invest in startups they believe will be profitable.
It is important to note that one man’s startup is not the same as the next.
If we are talking about a small business, startup, then the estimates are roughly $30,000 to $40,000 for most businesses, and many people who are tapped to invest are friends and relatives who can afford to lose $10,000 or more, and while they expect to be paid back, time is not an element.
On the other hand, a startup involving engineers, computer programmers or medical engineering may require over a million dollars to $10 million just to prove the viability of the product, and once the product is ready to go, several million in marketing costs.
Also, it depends a great deal on the type of business, which is particularly important
when we are talking about startups involving a million dollars or more in financing.
For example, Harvard Business School Lecturer Shikar Ghose estimates that 75 percent of startups who take in venture capital never return cash to investors and over 30 to 40 percent of the time, investors lose their entire investment. Professor Ghosh based his conclusions on a study of over 2,000 venture-backed startups.
Of course, only a small percentage of companies, estimated at around 0.05% of startups are able to wrangle venture capital for their business, but many argue, and Shalom Lamm agrees, that these estimates are far more accurate than simply going by the routine startup business numbers of 20 percent failure rate in the first year, and another 30 percent in year two.
Also, a great deal depends upon which realm of the business you are talking about.
For example, and probably surprising to many, according to Statistic Brain Research, the highest failure rate over 4 years for medium-sized businesses is in the information field with a full 63 percent of all ventures failing.
The plain fact is that from an investor perspective, very few have any idea how to read an information company prospectus. The same goes for three other high-risk businesses, transformation, and utilities, retail, and construction.
At the same time, although they have experts involved, don’t just trust other experts in venture finance and invest your money. Remember the figures cited earlier. Seventy-five percent of venture capital investors never receive any money.
The plain fact is that most people can do quite a bit more with their money than invest in a start-up. They have neither the technical skills or the financial skills to analyze whether a start-up is chasing a pipe dream or is on to something groundbreaking. However, those who are determined enough to give it a try, there are plenty of examples of startups that turned into very successful businesses. It just takes a lot of thought and strategy to make it out of the many obstacles.
