The startup ecosystem is making a seismic impact on our nation’s economy. It has jumpstarted economic growth, grown technological innovations, and contributed to job creation and retention. Not only that, investing in the startup ecosystem could be highly beneficial for High-Net-Worth (HNW) investors that are looking to impact, boost, or shake up their market and sphere of influence. If done right, investing time, attention, and resources into startups has the potential for significant Internal Rate of Return (IRR) and Return on Investment (ROI) for HNW individuals and investors.
The Initial Start
While a profitable result is the goal, it all starts with initial background research. Knowing what categories are both profitable and sustainable investment opportunities is part of this planning phase. For context, there has been significant growth in the arenas of digital technology, healthcare technology, educational technology, gaming media, and green technology. These niche areas show no sign of slowing over the coming years. Market research shows that investments in any of these tech and media industries could contribute to a robust and well-rounded portfolio.
Not only should the startup be profitable and sustainable but it should also align with a HNW investor’s core principles, passions, and values. Along with passion and profitability, experience in the space could also prove beneficial. However, some HNW investors find the best place to invest is in an entirely new or undefined category, then let the free market determine the viability.
The Planning Phase
There are many options when determining the direction and diversification of an investment portfolio. When planning action steps and investment collaboration, there are some choices to consider.
An investment consortium consists of a group of two or more individuals, companies, or governments that team up to work towards a shared and agreed-upon objective. Individuals and groups participating in an investment consortium pool their resources. However, they are each only responsible for requirements that are delineated and laid out in the consortium agreement.
An investment syndicate allows accredited investors to pool their venture capital through an investment vehicle and co-invest in a single place. In doing so, fund managers and lead investors can simultaneously start several funds back-to-back.
Early-stage investment groups are collections of investors that provide startups with seed funding while they are still in the market research phase or beginning stages of development. Joining an early-stage investment group can also eliminate the leg work of researching specific startups. This is because these early-stage investment groups are already investing in a diverse portfolio of promising startups. Early-stage investment groups can act as advisors without the accumulating fees and with a potential for QSBS tax benefits. Some of these groups include AngelList, Pitchbook, Signal, and Crunchbase.
Potential QSBS Benefits
The addition of entrepreneurial startup investments to a HNW portfolio could provide substantial QSBS tax savings for those that qualify. It’s always important for investors and investment groups to be aware of the QSBS exclusions. If a company and its issued shares meet the criteria laid out in Section 1202, QSBS can save investors millions in capital gains taxes after a 5-year holding period. Not only does QSBS tax savings make investing in startups more profitable and more attractive upfront, but could also impact the projected annual IRR and total growth ROI for a HNW investment portfolio.
There is great potential for HNW investors in the churning startup ecosystem. Through diversification, collaborating with early-stage investment groups, and understanding the nuances of eligibility for QSBS, HNW investors can make valuable, profitable, and sustainable investments. These HNW investments can both benefit investment portfolios and the economy-boosting startup ecosystem.
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This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.