Startups are not like real estate. So why invest in them at all?

Another thing that’s a challenge is that sometimes a very simple bet on real estate has a much higher return than startups with a lower failure profile. In fact in many emerging markets investing in a real estate plays probably just an index better on the overall country’s growth and a simpler way to get access to that growth than startups.

Startups are not real estate. Let me emphasize that again. Startups are not real estate. If you are a real estate investor expecting real estate returns do not invest in startups because most of them are going to fail.

So why invest in startups at all?

Well usually a few startups do well and some of those do really well and so while you might get ten twenty thirty percent returns in the real  estate market and occasionally even more than that you’re going to have some bumps in the real estate market at some points and startups aside from just being you know an interesting innovation and job creation and do have economic returns that in the aggregate are interesting. I’m not going to suggest that your startup is going to be the next unicorn but in the aggregate hopefully if we create more startups a few of them will become large but returns are highly asymmetric.

For startups investors, thinking about building a portfolio approach and not just investing in one or two startups but hopefully thinking about investing in 10 or 20 or more maybe even number of 500 perhaps might come to mind. Building a large portfolio is probably the best way to figure out how you might actually get reasonable returns from start. Another thing that I think is ongoing possibilities looking at the combination of real estate and startups as a way to hedge risk and drive some liquidity.

So sometimes you can see that investments in startups create activity and interest in the real estate properties that are around where the startups congregate and so investing in real estate while investing in startups might provide an edge and might provide a return at least on the real estate side.

Writer: Paul Njorojo

─ December 30, 2015