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Startup Investing: Why VCs and Angel Investors Fund New Businesses

According to a recent Commerce Institute research, the US became richer by 5 million new businesses last year. That may be a slight drop from the record-breaking 2021 when 5.4 million startups joined the country, but that was a time of awakening from the extended 2020 slumber. Inflation dictates many decisions now, leaving avid business owners with uncertainty.

We can’t predict how long the inflation will persist, but it hasn’t deterred many angel investors and venture capitalists from funding startups and early-stage companies. Why do they continue pouring money into new businesses? Let’s find out.

Portfolio diversification

Every savvy investor knows they shouldn’t put all eggs in one basket. For instance, investing only in stocks makes them vulnerable to constant market fluctuations, increasing the risk of losses affecting all their assets.

Portfolio diversification enables investors to spread the risk over many different asset classes, reducing potential financial losses. Investing in multiple startups distributes the risk across all new businesses, ensuring the existence of many successful endeavors to balance out potential failures.

Whether you’re an angel investor or venture capitalist, diversifying your portfolio is paramount, especially in times of high inflation. Besides reducing risk and volatility, it can help you increase your portfolio’s value.

Potential for high returns

Investing in startups is risky because you can’t predict the future, but few business ventures match their potential for high returns. Funding a business in its earliest stage requires less capital, so your potential rewards can be dramatically higher.

Of course, the founders and management teams must play their cards well to gain traction and positive customer sentiment. They must execute their business plans without a hitch and demonstrate top-notch performance worthy of your investment.

Still, the returns from a few top-performing startups in your portfolio might be higher than all their poor-performing or failed counterparts.

Investing in revolutionary business ideas

Financial benefits are primary incentives for most venture capitalists and angel investors. That’s understandable because no one wants to invest in a half-baked business plan without a growth potential and waste precious time and money. However, many find motivation in game-changing business ideas.

A promising business idea that could revolutionize the industry or vertical creates history. Investing in it means you could become a part of something that transforms the world and inspires others to follow in your footsteps.

Of course, that results in significantly higher returns than something already existing on the market.

Supporting innovation

As a startup investor, you help create jobs, support innovation, and drive economic growth. You can positively impact society and the environment; the financial gain is only the cherry on top.

This so-called impact investing is gaining traction among socially- and environmentally-conscious investors who recognize the massive value of green, sustainable initiatives and cutting-edge solutions, primarily in the tech and medical fields.

It’s a win-win for early-stage companies and their investors. Transforming communities while caring for the planet is highly rewarding, and not only financially.

How to find ideal startups for profitable investments

As an investor, you play an active role in critical business decisions, sharing your expertise to help startups in your portfolio grow and prosper. What if you’ve never invested in a startup? How can you evaluate companies and the risks to make a wise investment?

That’s where startup data comes into play. It’s crucial for new and experienced investors because it can provide actionable insights for data-driven decisions.

Finding startups to invest in becomes effortless with accurate, up-to-date startup data showing various companies’ headcount, location, founding date, traction, customer sentiment, and other critical information. It also helps investors learn more about the founders, including their performance and unicorn experience.

Data providers like Coresignal offer an extensive database of company records from multiple public sources. They maintain them for maximum accuracy and provide structured, ready-to-use data and regular update reports. They also let you specify the criteria to receive a custom startup data stream for educated decisions.

Conclusion

Investing in startups is risky because they’re illiquid assets that often fail. Many founders also overvalue their companies, hoping to attract more investors.

Conduct due diligence before investing to make sound decisions. Leverage alternative startup data to gain valuable insights into critical metrics, founders, and management teams. That’s the best way to find winning startups, reduce risks, and increase potential returns.

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