WHAT ARE THE RISKS OF INVESTING IN STARTUPS?

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Although investing in startups has many advantages, it is very important to bear in mind that investing in this type of company involves a series of important risks that it is essential to be aware of.

RISKS

• Risk of total or partial loss of the invested capital: investments in these early-stage, high-growth companies have a high degree of risk and uncertainty. Companies face significant operational and financial risks. While the expected returns for this type of investment are high, the investor should be aware that such returns may never occur or may be low, given the level of risk assumed. Total loss of the invested capital is possible and can easily occur.
• Risk of not obtaining the desired performance: the investment in these companies is totally uncertain, so that even if the shares acquired have managed to be sold to a third party, the returns obtained may not compensate for the time taken to achieve them or may not reach the initial capital contributed.
• Risk of lack of liquidity: lnvestments in early-stage, high-growth companies are illiquid and there is no secondary market for share transfers, so there is a risk of not finding a buyer for the shares or equity acquired by the investor. The maturity periods of these investments are uncertain and may take years, in some cases, before the investment is recouped.
• Risk of not receiving dividends: there is a risk that profits will not be generated in the year and, consequently, dividends cannot be distributed to shareholders. In addition, even in the event of profits, revenues are generally reinvested in improving processes, products and expanding the markets in which it operates, among others, so that dividends from such investments are not common and cannot be expected.
• Risk of dilution of the company's shareholding: These companies may need more capital in the future and, as a result, may decide on further capital increases. Although shareholders generally have a pre-emptive subscription right, it is possible that this right may be withdrawn. It is therefore possible that the percentage of the acquired shares in the total share capital may be reduced as a result of future capital increases.
• Risk of not being able to influence the management of the company: an taking minority shareholdings, there is no option to sit on the company's governing bodies or to influence its management.

Some of the risks faced by the invested startup and which also affect you as an investor:

1. Financial risk: Most start-ups are young companies with no track record of success, which means that the risk of failure is high.
2. Market risk: market demand may not be sufficient to sustain the start-up's growth, which may result in a loss of investment.
3. Equipment risk: The success of a start-up depends to a large extent on the founding team. If the team is not able to carry out its plan, the investment may not be profitable.
4. Regulatory risk: Government and market regulations can change rapidly and negatively affect the viability of the start-up.
5. Competition risk: the emergence of stronger competitors or the entry of new players in the market may undermine the position of the start-up and its value to investors.