Why is there such a boom for startup investments in Poland in 2022? Part II
Startup Investor’s Guidebook
Would you like to multiply your savings? Many would, but consistently money in banks is melting away and stock returns on public markets are yielding modest percentage points. Investing in recent years has meant agony and disappointment for many.
Interest rates on deposits and government bonds stand at all time lows. Corporate bonds are no longer safe despite relatively high yields. Investments in precious metals or works of art are risky and uncertain, even the surge in housing prices combined with slower growth of rental income has reduced the rate of return on housing investments. The wave of inflation, stagnation and awakening new thinking about economics have irrevocably changed investment trends.
Startups came to the forefront of value positions, in every respect.
The world has literally thrown itself at startups. Their potential has already been thoroughly tested in the US, Israel and Germany, where it has long been confronted. An entire generation of American multimillionaires has grown up on the back of successful investments in startups such as Instagram or Facebook.
In Poland, interest has only recently been growing. Meanwhile, we are veterans, if we take as a starting point the Universal Privatization Program of the 1990s was nothing more than a national rush for startups. Back then, it was growth, based on new personnel and new management of old enterprises. It was a popular move on Poland’s behalf which turned out many investors.
Anyone could buy a stake in a factory or even a bank. Many holders made considerable fortunes within a few years. Poland was able to take advantage of the opportunity, regardless of the wealth or age of the investors.
Why is there a growing interest in startups now?
First of all, a startup lures with the amount of financial profit.
Angels investors talk about investing in startups that profits can be ten times or even more higher. Of course, with higher profit comes higher risk, but….
when a business is developed through the Internet and managers focus on common services, when it has already collected considerable funding and the initiators can boast of previous professional success. — We reduce the risk Compared to the stock market or Forex, it is difficult to lose so much when investing in a startup,
Another advantage of startups valued by investors is the fact that by investing in them, we get the opportunity to participate in the development of new technologies and modern business models before anyone hears about them, and at a price allowing us to buy shares while they are still as cheap as possible.
Participation in the implementation of the project of a lifetime, especially when the founders face the biggest problems in the world, turns investors into gods.
However, are attractive financial returns and satisfaction with a startup’s potential “at the starting line” measurable at all?
It turns out that they are.
First, the average financial returns from startup investments are higher than those from public stock markets.
Secondly, investments in startups are a way to diversify your investment portfolio, because returns on investments in case of startups are not correlated with those from public markets. It is not always the case that when the stock market goes down, the valuation of a startup goes down.
The part of returns on the so-called venture capital that satisfies investors is due to supporting rare companies that generate above average returns. Returns on venture capital follow a power law curve, meaning that most of the returns are generated by just a few companies in a portfolio, similar to the Pareto principle, which holds that 80 percent of growth generates 20 percent of selected stocks.
According to Cambridge Associates, over a 20-year period, venture capital returned 11 percent of net income annually in the U.S., compared to 7.5 percent for publicly traded stocks.
This makes sense, given the higher risk due to the relatively low liquidity of such assets, but it is for this reason that investors expect higher returns on their capital.
Research by VC Andreessen Horowitz found that 6% of investments made by U.S. mutual funds between 1985 and 2014 produced 60% of the earnings. Funds that didn’t choose startups produced poor results at best.
What the average return hides is the large difference between the best and worst funds in the sample. Looking at U.S. funds that have been investing in startups since 1997, 25 percent of them produced a high return of 64 percent per year, while the performance of funds that bypassed investing in startups produced only 25 percent, which the U.S. market considered a failure.
Many investors of recent years have found valuing stocks of companies from the public markets increasingly difficult to justify economically, preferring to move into startups to find fast-growing companies at a large discount in valuation, even at the price of higher risk. Unicorns, which yielded $1 million in a decade, justifies this vision.
Investing in startups offers a rare opportunity for above-average returns, but how do you determine which startup to invest in, and how do you even value it?
You can read more about this in our next article in the series from the investor’s guide.