Some stop signs for startups

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After a lull during the recession, startup activity—business debuts and prelaunch development work—increased 60 percent between 2010 and 2011, according to the Global Entrepreneurship Monitor project, which is an annual assessment by a group of business schools.

Although investing directly in new companies gives you a chance to get in on the ground floor, you only have to recall the “dot-com bombs” of a decade ago to realize that today’s great opportunity might be tomorrow’s cautionary tale.

So what should you consider while you decide whether to support a new company? Most important is how long you are willing to wait for returns, says Bill Clark of MicroVenture Marketplace, which lets individuals invest as little as $1,000 in new companies. As many as 8 out of 10 new companies fail to produce significant returns—or fail entirely, he warns.

But even when a company succeeds, it likely takes 3–10 years to get a return on your investment, he says. Consequently, if you are nearing retirement, this investment isn’t for you.