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The word startup (emerging company), is a concept linked to business in the digital era that refers to companies in the early stages of their existence. Unlike other established commercial entities, startups represent businesses that will be rapidly scalable, making use of digital technologies.

As its name implies, the term only applies at the start of the project. Once it reaches other stages of development, it stops being called that. The main technological giants, such as Facebook, Google, Airbnb or Uber started as startups.

Another of its characteristics, is exponential growth, which means that it must have the ability to acquire users at an accelerated rate with means of distribution that allow it to reach a greater number of customers, as well as a sale that is not linear.

According to the Organization for Economic Cooperation and Development (OECD), of the nations that make up the Pacific Alliance (Mexico, Chile, Colombia and Peru), our country is the most advanced in terms of financing for early-stage companies.

In Latin America, according to AngelList, Brazil is the country with the highest number of startups, followed by Mexico, where startup ecosystems are more distributed in the territory, with 32% in Mexico City, 10% in Guadalajara and 8% in Monterrey. Almost a third operate in the financial services sector (FINTECH), followed by health, information and communication technologies (ICT), and education.

The risks of investing in a startup:

According to various investigations, only 10% of startups exceed three years of life and 2% manage to reach five years. The risk in this type of business is very high, so the chances of losing the money invested are very high also.

The first advice would be: "don't put all your eggs in the same basket", that is, don't invest in just one startup. To invest in this asset class, it is best to have a portfolio and bet, for example, on 10 projects in the hope of making money on one of them and thus offset the losses incurred on the other nine. In addition, investments in these types of assets should be between 10% and 20% of your assets.

To avoid the feeling of "playing Russian roulette" when making this type of investment, it is necessary to make an informed decision after a good global analysis of the company, its business model, its market, the growth possibilities, the environment and the management team, among others.

A startup goes through various scenarios during its growth, such as: lack of capital, continuous review of sales forecasts, unfair competition, periods of low motivation by the founding partners, etc. Therefore, the initially anticipated returns may never occur.

As a potential investor, you should consider the following risks:

Insufficient market, due to not having adequately identified the needs of potential customers or, given their consumption habits, they are not prepared to accept a certain technology.

Little or no scalability of the business model. Continuous growth (and preferably exponential) is a characteristic that a startup must comply with, or else die trying.

Impossibility of influencing the management of the company, as it does not have a majority stake, which in practice means being a mere spectator and waiting for the decisions of the government team.

Absence of dividends, since a newly created company takes several years to obtain benefits and also needs to capitalize as quickly as possible, so self-financing is day by day.

Dilution of the participation, since each time the company goes to a new round of financing, new shares are issued that are bought by new investors and that cause the percentage of participation in the company to be reduced, with the consequent loss of power and control.

Legal or regulatory risks that must be considered, since they can be a barrier to entry to some target markets, or a source of legal problems, compensation or sanctions.

For all of the above, before making the decision to invest in a company of this type, we recommend consulting Arrangoiz & Asociados, specialists in Corporate Law and experts in the world of startups.

Avoid scams and unpleasant surprises.

Take care of your investments!

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