In choosing an investment, the investor matches risk to reward.

A public stock may go down but most likely will not go bankrupt.

A startup is much more likely to go under.

Since the risk is low in a publicly traded company, the reward may be low.

Since the risk in a startup is high, the reward must be high.

For later-stage startups the risk of going bankrupt is lower than for earlier-stage companies.

Therefore, the return on investment may be lower.

Beware investments such as restaurant deals where the reward is low but the risk is high.

Most restaurant deals offer a percentage of revenue over the lifetime of the business and nothing on the exit.

The risk is high because it could go under in the first few years.

In many cases, a restaurant deal will give the investor a 10 to 20% return but stands the chance of losing all of it by going out of business.

For a true early-stage company, the reward must be high because the risk is high.

Match risk to reward in your startup investing.

 

Thank you for joining us for the Startup Funding Espresso where we help startups and investors connect for funding.

Let’s go startup something today.
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Thank you for joining your host Hall T. Martin with the Startup Funding Espresso — your daily shot of startup funding and investing.
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Disclaimer:
Hall T Martin is the director of Investor Connect, which is a 501(c)(3) nonprofit dedicated to the education of investors for early-stage funding. All opinions expressed by Hall and podcast guests are solely their own opinions and do not reflect the opinion of Investor Connect. This podcast is for informational purposes only and should not be relied upon for the basis of investment decisions.