Monday, April 14, 2014

Why add start-ups to your investment portfolio?


 
This work by Marcelo Bernardes (@marcelobern) was originally posted on LinkedIn.

I recently had an epiphany: I should review my investment portfolio to include start-ups. Let me share my rationale with you, so you can reach your own conclusions.

The Corporate Scenario: Proven Execution

According to Steve Blank, "Every large company, ... is executing a proven business model". So, it should come as no surprise when large companies "... have a hard time with continuous and disruptive innovation.", continues Blank (Inc.). And my observation of large companies corroborates that seeking efficiencies and cost cutting, are here to stay.

Millennials Are Here!

There is a lot of debate about millennials. Be it because of economic reasons (Entrepreneur), social reasons (infographic) or education reasons (CNBC), the reality is that millennials prefer to build their own businesses, rather than join existing companies, regardless of size.
"54 percent of Millennials say they either want to start a business within the next five years, or have already started one" (Miami Herald)
"By 2025, millennials will account for 75% of the global workforce and by next year (2014), they will account for 36% of the American workforce." (Forbes)

The Perfect Storm

So the stage is set. By attracting Millennials - the youngest generation in the workforce, start-ups are likely to become the key innovators. As innovation eventually leads to (economic) value creation (infographic), it means today's start-ups are to be responsible for a growing share of the value creation in their industries.

On the other hand, by failing to attract Millennials and foster innovation from within, large organizations will have to acquire innovative start-up companies, often at a premium price, in order to incorporate the needed innovation to their product lines.

Granted, historically established companies were unlikely to come up with "the next big thing" ("The Innovator's Dilemma"). That is not what I am talking about here. I am talking about feature level innovation, which used to be driven by internal R&D and bright professionals, who may be leaving to build their own businesses.

Start-ups as Part of Your Investment Portfolio

So, for an investor, this means that start-ups are ever more attractive, specially for those looking for growth. Fortunately, equity crowdfunding is now available in various countries, making it possible for every day investors to explore start-ups as an investment option.

Still, as 80% of the start-ups fail in the first 18 months, for the equity crowdfunding start-up investment to be profitable on average, it is desirable to mitigate this risk. And why not take a page from the venture capital playbook and leverage start-up funds, where you can invest in a group of start-ups at once, aiming to reduce the investment risk. And in fact, companies like wefunder are already offering such products.

That is my rationale to add start-ups to my investment portfolio. I would like to hear your thoughts, so please feel free to use the comment box below to share your point of view.

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