Investing in startups as an escape from inflation?

In the first quarter of 2022, Polish innovative companies received over PLN 1,1 billion from venture capital financing (quarterly report of PFR Ventures and Inovo Ventures). This is the best start of the year in the history of the Polish startup market (for comparison - Q1 2020 - PLN 249 million, Q1 2021 - PLN 243 million). 57% of the transaction value came from private capital. Startups, young companies and innovations are becoming more and more popular among Polish investors, and individual investors more and more often reach for innovative ventures, adding them to their investment portfolio. Discussions on investments in innovation will be the main topic of the open conference Reach4.biz Meetup on June 2 in Warsaw.

A way for inflation?

Could investing in startups be a new way not only to achieve high returns, but also to escape? inflation?

In times of high inflation, it is not worth keeping cash, but investing it in diversified assets. One of them may be shares in startups, which are of course always burdened with investment risk, but offer the possibility of above-average returns, at which inflation does not matter. It is also worth remembering that an investment in a startup has a fairly long investment horizon, which can be up to 10 years. It is highly probable that, starting from such an investment, we will have a completely different economic environment. - comments Paweł Zylm, investor and business angel.

In a risky game, play consciously

Portfolio diversification is a key element of investing in young companies with high or very high risk of failure. A startup should occupy the part of the portfolio dedicated to asset classes with a very high investment risk. Hence, haste can be a bad advisor here. Choosing a startup for a portfolio takes the time necessary to search for this delicious idea, its analysis or the investment implementation process itself.

So how to invest in times when we often want to get rid of cash, which is chewed up by inflation? After all - calmly. There are several methods for investing in innovative companies - from the direct one through the purchase of shares, indicated by 1 in 3 investors as preferred (Polak Investor: Edycja - Startups, 2021), through investment with the support of a network of business angels, indirectly through a VC fund, or through the crowdfunding platform.

In the process of searching for investments, you can use the support of institutions and people who are on a daily basis "in the market" - whether by investing through a VC fund or using the support of a network of business angels. In the case of lower capital, you can use crowdfunding platforms that try to organize the published information about issuer companies. We should remember, however, that in each of the models, regardless of the specialists supporting the entire process, the risk remains invariably very high, and the investment decision should be a conscious and exclusive decision of the investor.

However, innovations are not only the unregulated market, but also the stock exchange. Young innovative companies do not always choose the path of financing rounds collected from VC / PE funds and business angels. There are also those that open the doors of the stock exchange, thus opening up to investors with various sizes of portfolios. An example of an innovative company that creates solutions in the OLED technology segment, competitive on a global scale, is Noctiluca in Toruń, which debuted on New Connect on April 12.

What can I invest outside of equity?

Investing capital combined with the investor's competences - smart money is also more and more popular. Investing in a startup with a good valuation in today's times of rising prices can be an interesting alternative to low-risk investments, the profits of which are consumed by inflation. But I warn investors and startups against the financial investment itself, in my experience the so-called investment benefits the most. smart money, in which, in addition to financial resources, the investment target receives knowledge, relations, contacts and complementarity with other investor's businesses. - comments Michał Żukowski, vice-president of PZPN Invest SA For this type of investment, however, you need time, because a young company, like a small child, needs much more support and intense commitment than a business that has been operating for many years.

Invest in tomorrow?

Startups are an investment for many years, often with reduced liquidity, with capital frozen for 7-10 years, with high risk. Therefore, it is worth investing in ideas that show not only the ability to "deliver" the promised processes and numbers, but also a significant potential to influence what tomorrow will look like. Such innovations have a chance to catch on in the market and bring this exceptionally high return on capital.

Venture investments have always been one of the most risky. Every investor should take into account the possibility of losing all invested capital. It is worth remembering that rising inflation does not lower the risk factors of this type of investment, it can only subjectively increase their attractiveness in relation to other groups of assets. In the conditions of galloping inflation and growing regulatory uncertainty in Poland, more and more people see the need to geographically diversify their portfolios. In my opinion, in the coming years, investors in fintech and crypto companies embedded in stable regulatory regimes can count on the highest rates of return compared to risk. In the future, every company will be a fintech company. Lukas S. Zgiep, Ph.D., Co-Founder & General Partner Pointer.Capital.

For more information on investments in innovations, startups and young companies, please visit Reach4.biz Meetup conference (June 2, Warsaw, Kinoteka) - Forex Club is pleased to take the patronage over the event.

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