Startups are often the gleaming gems that capture attention and promises transformation as well as high returns in the world of investing. Venture capitalists have long chased these privately-held and high-risk companies. But it is a path strewn with potential losses and retail investors should be cautious about jumping in. The failure rate for the startups is 90% and retail investors risk hefty losses without the deep resources that venture capital firms possess.
Retail investors are increasingly gaining access to startup shares with the rise of secondary markets and platforms like Forge and EquityZen. Forge went public through a SPAC and quickly suffered an 88% drop in value. Some secondary platforms continue to offer entry points for non-accredited investors. Newcomers like Canada’s Hiive and Linqto promise low minimum investments and it is appealing to smaller-scale investors.
Retail investors lack access to detailed insights, the sophisticated analysis and the structured approach that professional venture capitalists rely on. Retail investors are often left with a narrow view and to invest on a combination of hearsay as well as news hype. Well-known names like SpaceX, Anduril and OpenAI may appear like golden tickets, but investing based on popularity overlooks a core truth that venture capitalists are evaluating the whole market.
Diversification can help in managing just some of the risks. A portfolio of multiple startups spreads exposure and lessens the potential for a complete wipeout. But even this approach does not eliminate the danger of unknown variables and this is a reality the venture world refers to as “unknown unknowns.”
Many AI ventures may end in losses. Retail investors entering without insider knowledge or professional insights are likely to be swept into the hype. Analysts like Vinod Khosla are forthright in cautioning that most AI startups may face financial downfall.
The thrill of startup investing is undeniable and yet the dangers are equally pronounced. Cautious optimism is important for retail investors without the networks, tools or risk tolerance of a venture capitalist.
