Early-stage investing is speculative and risky. Early-stage investments should be made only by accredited investors able to bear a total loss of their investment and should comprise only a small percentage of an investor’s portfolio. Specific risks associated with early-stage investing include:
1. Information. Startups by definition have little or no track record and the variance between information provided by the company, including projected performance, and actual performance is substantial.
2. Management. Early-stage stage companies are frequently led by inexperienced executives and may have no outside directors. In addition, startups have a small number of employees and often have insufficient managerial staff.
3. Key Person: Startups depend completely on the knowledge, commitment and capability of their founders and may be unable to replace founders who leave the company.
4. Competition. Technology markets are unstable and fast changing and few startups are able to create significant barriers to entry. Many startups also face competition from established companies with far more resources and may be unable to create or maintain a sustainable competitive advantage.
5. Product. Most startups produce a single product or product line. Their products are typically new and not profitable and it is uncertain whether any product will ever achieve market success.
6. Financial. Early-stage stage companies require significant growth capital and may be unable to obtain capital timely or deploy it effectively. Startups typically sustain net losses for many years and may never achieve profitability.
7. Technology. Many technology companies depend on proprietary technology and may not be able to defend their intellectual property rights adequately. In addition, startups may be forced to devote scarce resources to defending against infringement of intellectual property rights.
8. Employee. Startups in the technology sector depend on finding, hiring and retaining talented engineers. The supply of engineers, particularly software engineers, is insufficient to meet demand and most startups have difficulty finding and retaining engineering personnel.
9. Exit. Most startups will never conduct a public offering or be acquired and investors may never receive any return on their investment.
10. Liquidity. Securities issued by private companies are subject to legal restrictions on transfer. In addition, there is no active secondary trading market for most private securities and investors may be unable to sell any of their shares.