Are start-ups better investments than established companies?

If you’re considering investing in stocks and shares, there are many options open to you. At the end of the day, however, you are investing in companies, and the return you get on your investment will depend on how well that company does in the real world. You can look at investing in different business sectors or in companies in different parts of the world, but one question you’ll continually find coming up is whether it’s better to invest in newer companies or in ones that have been around for a long time?

There are pros and cons to both approaches, and the answer is that it depends on your temperament and what you hope to get out of your investment. All investors hope to make a profit, but there is also a special satisfaction in watching a company that you’ve supported from its earliest stages succeed. By contrast, investing in a big established firm can feel impersonal. But many people prefer that sense of detachment, which helps them keep emotional judgements out of business and financial matters.

Risk and reward

 New companies and start-ups can be a very risky investment, but if they succeed, the rewards can also be impressive. Most new companies don’t make it, and there’s a real risk of losing your money. But if they do make it, you can expect a very high return, sometimes in the region of thousands of per cent.

If you’re looking for a company to invest in, you should check out the best share tips in order to get an impartial overview of recommended stocks. But perhaps you’ve come across a brand-new company that you think shows promise. You may know the founders personallyor feel an affinity with their product or service. These are all legitimate reasons to consider investing in a start-up.

Getting in on the ground floor gives you a personal connection to the company’s fortunes and makes you feel a part of the team. But making an emotional investment as well as a financial one isn’t always wise. It can cloud your judgement when you need to be dispassionate, cold and logical, looking after your own interests first. If the company is obviously failing, you need to sell up and get out, rather than sticking around out of loyalty or sentiment.

The advantage of established companies

 Established companies are a safe bet. They have a proven record of success, and big-name brands have a competitive edge by simple virtue of their familiarity and staying power. Household names got that way for a reason. They are usually the best at what they do, or at least the most convincing.

It’s not always necessary to go for the biggest company in a field. Instead, look for the best: the one most likely to prosper and offer long-term rewards. With established firms, there is far less risk that they will go under. While you won’t see the kind of dramatic increase in share value you might get with a start-up, there’s a strong likelihood that your investment will steadily grow from year to year.

When to invest

 New companies go through several distinct stages, and each stage attracts different kinds of investors. A true start-up is still in the ideas phase and probably doesn’t yet have a product to market, a customer base or any money coming in. They are looking for investors to provide seed money in return for an equity stake.

Once the start-up has seed money, they will start pitching to angel investors, private individuals who specialise in backing start-ups. This is usually the first stage of investment after friends, family and founders (FF & F). Once a business plan is in place and the company is moving forward, venture capital might get involved, often also taking on advisory roles or directorships.

The stage at which you invest depends on your risk tolerance and your belief in the company. The earlier you get involved, the higher the risks. But the potential rewards are higher too.

Due diligence

 Critically examinethe company’s business plan. Will it work in the real world? When investing in a startup, you’ll often have to evaluate new, untested ideas with nothing to compare them to. Don’t forget to look atlegal, regulatory and compliance issues.

Every world-beating multinational started somewhere. Getting in on the ground floor with the next Apple, Amazon or Google is every investor’s dream. In most cases it won’t come true, but diversification can reduce risks and increase your chances of finding the one startup in ten that really makes a difference.