Understanding Alternative Investments

Investors are increasingly seeking alternatives to traditional asset classes such as stocks and bonds. In fact, the global alternatives market is projected to reach $24.5T by 2028[1]. The rise of alternative investing has been fueled by a desire for diversification and the opportunity to support innovative ventures. One aspect of this trend is the growing interest in investing in startups. In this blog post, our team at MicroVentures explores the broader spectrum of alternative investments and delves into the exciting world of startup investing.

What Are Alternative Investments?

Alternative investments encompass a diverse range of assets that go beyond the traditional stocks, bonds, and cash. These non-traditional investments can include real estate, hedge funds, private equity, cryptocurrencies, startups, commodities, and more. Investors might be drawn to various types of alternative investments for several reasons, including the potential for higher returns[2], lower correlation to traditional markets[3], and increased portfolio diversification.

Types of Alternative Investments

Startup Investing

Among the various alternative investments, startup investing has gained traction in recent years. Startups represent emerging businesses that are often in their early stages of development. Unlike traditional investments, which typically involve established companies, startup investing allows individuals to support innovative ideas and disruptive technologies from the ground up. Platforms like MicroVentures can enable investors to access a wide range of startup investments in the private market.

Venture Capital and Angel Investing

Venture capital (VC) and angel investing are two primary avenues for participating in the startup ecosystem. VC involves pooling funds from institutional investors to support early-stage companies with high growth potential. On the other hand, angel investors are typically high-net-worth individuals who invest their personal funds in startups. Both approaches could provide an opportunity to be part of a company’s journey from the startup stage.

Equity Crowdfunding

Crowdfunding is the process by which a large number of individuals make small monetary contributions into a single pool, ultimately funding a new venture or project. Platforms like MicroVentures can enable individuals to invest in early-stage companies in exchange for common or preferred equity. This direct involvement may give an investor a sense of ownership and the potential for growth if the startup succeeds.

Additionally, equity crowdfunding helped open the doors for the everyday investor to invest in startups. Previously, startup investing was limited to high-net worth individuals and institutions. Equity crowdfunding opened the doors for non-accredited investors, those who do not meet the specific requirements for income and net worth, to invest in startups with investment minimums as low as $100.

Cryptocurrency and Blockchain Investments

The rise of blockchain technology and cryptocurrencies has introduced a new dimension to alternative investments. Blockchain projects and decentralized finance (DeFi) platforms may offer opportunities for investors to participate in the evolution of financial systems. While the crypto market can be volatile, it has attracted those seeking high-risk, high-reward opportunities outside traditional financial markets.

Real Assets and Real Estate Crowdfunding

Investing in tangible assets such as real estate has long been considered an alternative investment strategy. Real estate crowdfunding platforms may allow investors to pool funds to invest in real estate projects, providing exposure to the property market with potentially lower investment amounts or direct property management responsibilities.

Risks and Benefits

Risks

While alternative investments present opportunities, it’s essential to acknowledge the associated risks. Startups and other types of alternative investments, by nature, are high-risk endeavors, with a significant percentage facing failure. Investors should carefully assess their risk tolerance and conduct thorough due diligence before allocating funds to alternative assets.

Startups, especially those in their early stages, have a high likelihood of failure. Many factors contribute to this, including market competition, management issues, insufficient funding, and unexpected market changes. Investors should be prepared for the possibility that their startup investments may not achieve the anticipated success.

Additionally, unlike publicly traded stocks, which can be easily bought or sold on the stock market, startup investments often lack liquidity. Exiting an investment in a startup can be challenging and time-consuming. Investors may need to wait for several years, often until the company goes public or is acquired, to realize any returns. This illiquidity can be a concern, particularly for those in need of quick access to their funds.

Benefits

One of the key advantages of alternative investments is their potential to enhance portfolio diversification. By allocating funds across a range of asset classes, investors can help mitigate the impact of market volatility on their overall portfolio. Diversification can help mitigate risk across a variety of industries, locations, and growth stages.

Alternative investments also potentially could have higher returns compared to traditional asset classes. However, the higher potential returns are typically accompanied by higher levels of risk, making it crucial for investors to carefully evaluate potential opportunities.

Investing in startups can also provide a unique opportunity to be part of groundbreaking innovations and technological advancements. By supporting early-stage companies, investors can contribute to the growth of industries and technologies that have the potential to reshape the future. This aspect of alternative investments could go beyond financial returns, offering a sense of involvement in the progress of society.

Final Thoughts

The rise of alternative investments may be signaling a shift in the way investors approach building and diversifying their portfolios. From traditional assets to startups and emerging technologies, individuals now have several options to explore. While alternative investments present opportunities, it can be important to approach them with a well-informed and diversified strategy.

Startup investing, in particular, offers a dynamic and participatory experience, allowing investors to contribute to innovative ventures. As the financial landscape continues to evolve, embracing alternative investments may become not only a means of diversification but also a way to engage with the transformative forces shaping our future. As with any investment strategy, careful consideration, due diligence, and a clear understanding of risk tolerance can be essential for navigating the ever-expanding world of alternative investments.

Are you looking to invest in alternative investments? Sign up for a MicroVentures account to start investing!

Want to learn more about investing in alternatives like startups? Check out the following MicroVentures blogs to learn more:

• Navigating Uncertainty: Building a Diversified Portfolio
• The Digital Frontier: Impact of Technology on Venture Capital
• Seeing Beyond the Numbers: Valuing Early-Stage Startups
• Balancing Act: Mitigating Risk in Venture Capital

 

[1] https://www.investmentnews.com/alternatives/news/global-alternatives-market-set-to-reach-24-5t-private-credit-aum-to-double-244679

[2] https://www.investopedia.com/terms/a/alternative_investment.asp

[3] https://www.investopedia.com/terms/a/alternative_investment.asp

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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.