It was “breaking news” in major media. Saudi Arabia, which does not as yet have diplomatic relations with Israel, will be investing in Israel through Affinity Partners, a fund started by Jared Kushner, President Trump’s son-in-law and one of the architects of the Abraham Accords. What was even more intriguing was the news that their initial investment will be in a startup tech company. With over 6,000 active startups and an economy dominated by industrial high-tech and entrepreneurship, Israel certainly earned its nickname as ‘The Startup Nation’.
Israel is an example of a country that has fared extremely well with start-ups meaning that a large percentage of the startups survived and went on to become profitable businesses. Perhaps the Saudis did their homework and recognized the high percentage rate of success. Many of the Israeli startups appeared to be a win-win because of their “exit” strategy, namely that they were acquired by larger international conglomerates. Because of their success rate, they have been able to attract many investors who certainly helped capitalize the fledgling businesses.
In general, startup investing is potentially lucrative, and can produce a return that is many times greater than the investment. But the flip side is that it is equally as risky and potentially disastrous from a financial point of view. In general, the vast majority of startups fail. People lose money on startups even with good research that shows the potential money-making opportunity.
While Israel is known for its high tech startups, in the US they include many different categories, including Manufacturing, Artificial Intelligence, Data Science and Analytics, Biomedical and Biotechnology, Mental Health, Tourism and Hospitality and Digital and Internet Marketing. Some investors are comforted by the thought that they are not locked into one specific category.
Most startups are small businesses and as a result have all the issues associated with being a small business. There are currently 31.7 million small businesses in the United States, which make up 99.9% of all U.S. businesses. Many small businesses are start ups but the failure rate of those start-ups is high. As of 2021, 20% failed in the first year, 50% within five years, and 65% within 10 years. On the positive side, the Small Business Administration (SBA) reported that as of March 2021, 80% of startups survived after one year.
Experts say that the reasons for failure include money running out, being in the wrong market, a lack of research, bad partnerships, ineffective marketing, and not being an expert in the industry. The experts say that most failures are due to making the wrong assumptions and bad planning.
Looking back, if ever there was a “gold rush” for start-ups, it was in the late 1990’s when a speculative bubble was created by the rapid rise and interest in internet companies. During the five years leading up to the peak in March 2000, many businesses were born with the primary focus of gaining market share through brand building and networking. The dot-com bubble was a direct result of excessive speculation of Internet-related companies. The projections may have been right on the mark, but they were in many ways premature. Investors believed that they were on the cusp of making billions from the new internet-related startups. On March 10, 2000, the NASDAQ Composite stock market index peaked at 5,048. But the bubble burst causing many companies in the dot-com sector to crash. By October 2002, stocks had declined in value by 75%.
The crash was devastating to many investors as many people invested their life savings into the dot.com opportunity. Many of the start-ups were selling technology that quickly became outdated and they did not have the resources to invest in the next generation. They could also not compete with the mega companies who suddenly appeared out of nowhere and became major players in the developing internet industry.
For those that believe that investing in startups is worth the risk, they can always point to the mega successes of companies like Amazon, eBay, and Priceline which managed to not only survive when the dot.com bubble burst but to become iconic companies on the world scene.
By far, the overwhelming number of investors lost huge sums of money on their investments into the dot.com companies. Financial experts agree that investing in start-ups is extremely rieky albeit that there are ways to invest in startups to minimize the risk. One such strategy would be to invest through crowdfunding sites.
Startup investing is not for everyone, especially for those who want low risk and reliable income. It is also not for people who have limited funds and who have to dig into hard-earned savings that may have a detrimental effect on their families. Investing in startups is not for everyone. It is not like investing in stocks. If you bought a stock today and changed your mind tomorrow about your choice, you could easily sell it even if you lost a few points from what you bought it for. Startups, on the other hand, are highly illiquid. When you invest in a startup, you can expect that your money will be tied up for at least three to five years, if not more.
You also feel helpless as economic conditions change or even the very concept that you invested in. An investor put a significant amount of money into what was billed as a “revolutionary” medical hand held device. By the time the device made it to market, two other more advanced products hit the market. Because of the confidentiality, the investor had no way of knowing that his investment concept would be usurped by the two other devices.
Many investors say that they rely on the business plans and research that is presented to them. But what they do not realize is that the plan and research are only as good as the people who put them together. Investing in a start-up sounds like a great idea but as the traffic sign says, “proceed with caution!”