The million euro question – how to invest in startups?

Author: Wilhelm Lindholm, Chief Investment Officer, Innovestor Ltd.


For a long time, it was challenging for private investors to invest in startups. Returns from startup investments have been excellent during the past decade in Finland (FVCA 12.4.2018), but beneficiaries have mainly been large institutions, affluent family offices and a few high-profile angel investors. Fortunately, the situation has changed in recent years, and the possibilities for private investors to invest in startups have increased. Now the high returns from future success stories and unicorns* are accessible to everyone. (* startup valued above USD billion).

 

How to invest – challenges with current alternatives

Venture Capital (VC) funds have traditionally been the principal investment channel into startups. VC funds, however, are regulated investment vehicles which can only be offered to professional investors, due to the high minimum investment amounts and illiquid long-term limited partnership structures.

In recent years, various crowdfunding platforms have raised considerable sums of capital from private investors. Generally, the platforms do not themselves act as investors, but brokers. This is reflected in their selection criteria, investment terms and company valuations. There is a risk, that the interests of the broker and the investor may not be aligned.

The last option is angel investing – but it requires significant know-how and risk appetite. For that purpose, various angel networks have been formed, which teach the science/art of the game and connect angels and entrepreneurs. The largest such network in Finland is FiBan.

 

Co-investment model – convenient and straight forward

Innovestor is the first in Finland to offer everyone the opportunity to invest directly into early-stage startups together with a professional and experienced VC investor. The key word is together, and we call it co-investment model, which is a rapidly growing trend worldwide. In practice, the way it works is that Innovestor takes the role of lead investor in the funding round. This entails evaluating and vetting potential investment targets, doing background checks, and negotiating deal terms. Everyone is then given the opportunity to co-invest alongside us into the selected companies.

We strive to be an active value-adding investor, and the preferred partner for ambitious entrepreneurs building transforming businesses. Our task is to contribute not only capital, but also know-how and networks to increase the likelihood of success in the often challenging tasks of developing and commercialising new technologies and innovations. Early-stage ventures are high-risk, but also potentially very high-reward projects – on the portfolio level we target c. 20% annual returns.

 

Diversify – and win

Diversification is said to be investors only free lunch, because it improves the risk-return relationship. Studies consistently show, that diversification improves the expected returns in startup investments. Another interesting feature of startup investments is that while the downside is capped (at 1x), the upside is theoretically unlimited. Most of the value creation in companies takes place before they are listed on any stock exchange. These characteristics, coupled with effective diversification, makes investing in early-stage ventures an attractive proposition. Also, historically venture capital as an asset class has not been strongly correlated with the stock market. Therefore, allocating some part of the investment portfolio into venture capital, may in fact have positive impact on the overall return-risk ratio.

 

Growth Portfolio – build your own diversified startup portfolio  

Together with us, you can invest into a selected (single) company, or diversify your investment into multiple startups. In order for a private investor to benefit from diversification and the expertise of a professional VC investor, we have developed the Growth Portfolio investment program.

The Growth Portfolio enables private investors to make investments into ten promising startups with only one signature. We select the companies, and invest in each of them as described above . The minimum Growth Portfolio investment amount is EUR 50,000 (EUR 5,000 per company). Capital is called as investments are made, and no upfront transfer is required.

As a result, over the course of approximately a year, the investor builds his/her own well diversified startup portfolio. Unlike in VC fund structures, no management fee (or any other recurring fee) is charged from Growth Portfolio investors. Also, shares in Growth Portfolio companies are  completely freely trade-able (eligible for secondary market), if the investor e.g. wants to realize the value appreciation before an exit.

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Wilhelm Lindholm

Wilhelm Lindholm

Chief Investment Officer, Innovestor Ltd.

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