Investing presents a wide array of options that may be overwhelming when you’re getting started. Your investment choices can vary by type, risk versus reward, liquidity, personal interests, and more. One way to sort through investment types is to start by evaluating the two big “buckets”—traditional versus alternative investments. A healthy investment portfolio typically takes a balanced approach to include different types of investments, so it’s good to understand the range of options available to you.
Traditional vs. Alternative Investing Defined
The initial divide in investment types can be made between traditional and alternative asset classes. Traditional investments include stocks, bonds, and mutual funds—what many people first think of when you mention investing. Each of these types of traditional investments can be broken down into smaller categories, such as the specific type of stock or bond you could choose (e.g., growth or penny stocks).
The alternative assets class can be broadly defined to encompass many types of potential investments, such as private equity, which invests in non-publicly traded companies, and venture capital (VC), which invests in early stage private companies, as well as hedge funds, real estate, artwork and collectibles, intellectual property, commodities, film, and more.
The range of alternative investments covers a lot of ground, but it basically includes any type of investment that isn’t one of the traditional asset types (i.e., stocks, bonds, mutual funds).
Characteristics of Alternative Investing, Particularly Startups
As with any type of investment, alternative investments carry both risk and potential for great reward, albeit at the more extreme sides of the spectrum. Let’s take a look at some of the differences and potential pros and cons of alternative asset investments.
Alternative assets aren’t on the stock exchange. This can make these investments a good choice for portfolio diversification since they generally aren’t affected by market fluctuations in the same ways your traditional assets are, helping provide some balance in your portfolio.
Venture capital and private equity are available to anyone who is an accredited investor, as defined by the SEC. Currently, accredited investors need to meet certain income and/or net worth qualifications, and you can determine if you qualify by reading the SEC requirements in the Accredited Investors SEC bulletin.
If you don’t meet the accredited investor qualifications, you can still invest in crowdfunding offerings, which are open to the general public. Securities-based crowdfunding, along with the few applicable rules, is explained in detail in this SEC Investor Bulletin. Likewise, investment opportunities in most types of alternative assets, such as real estate and collectibles, are also open to the general public—unless they are bundled within, and investment is offered as units of, a special purpose vehicle.
Because startups are not publicly traded, you will not receive the same type of updates you would for public stock investments. According to the SEC, companies and private funds with exempt offerings don’t have to provide prescribed disclosures to accredited investors. However, some startups will provide updates even though they’re not required, and there are no rules against requesting information. You also have the opportunity to (and should) perform due diligence before making an investment.
Investments in startups, especially early stage startups, will typically be held for a lengthy period of time. For example, during 2001 through 2019, the median age of a startup at its initial public offering (IPO) was 10 years old, according to the Initial Public Offerings: Updated Statistics report.
There may be some exceptions that allow you to liquidate before the startup you’ve invested in reaches an exit. This SEC guidance describes allowable conditions of resale, but keep in mind that liquidation is also subject to the discretion of the issuer.
Investing in startups requires a high risk tolerance. There are not only no guarantees that you will receive a good return on investment, but the startup could fail and you may lose your original investment.
Potential Return on Investment
Many startup investors hope to invest early in the next big companies, such as Pinterest or Zoom. For the investors who pick the right startups at the right time, the return on investment can be well worth the wait, and a startup doesn’t need to be a splashy name in order to yield a decent return on investment when it reaches an exit.
Targeted Interests and Values
One of the intangible rewards of investing in alternative assets such as startups is that you can support young companies that pursue interests or values you share, and you can jump in on product or value trends, such as sustainable fashion or CBD-based products coming to market. Investing in startups can also allow you explore investments in niche and emerging markets.
Ready to Add More Diversification to Your Investment Portfolio?
Alternative assets, and particularly VC and private equity, can allow you to add diversification to your portfolio while also personalizing your investment options by enabling you to choose startups and other investment options that may be of personal interest to you. If the balance of risk and potential reward is right for you, check out the current offerings on the MicroVentures platform to get started.
The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.