What is the most powerful tool in an investor’s armoury? Arguably, it is time. The earlier you invest, the more opportunities for compound interest (the “8th wonder of the world”) to work its power. In this guide, our team explains the transformative potential of compound interest and how early-stage investors can apply it to their portfolios.
We hope these insights are helpful. If you want to explore our early-stage investments here at Bure Valley Group’s exclusive network, please get in touch.
What is compound interest?
Compound interest is sometimes called “interest on interest”. In simple terms, when you invest money, you not only earn interest on the principal – you also earn interest on the interest itself.
For instance, suppose you place £10,000 into a 1-year fixed savings account. At a 5% interest rate, the interest earned would be £500 after one year.
If this is re-invested into another account at the same interest rate, then £550 interest would be earned at the end of year two.
Over fourteen years, the principal would be doubled. This highlights a key feature of compound interest – it “snowballs” over time. This can be amplified if an investor makes regular, consistent investments over a sustained period of time.
Compound interest and early-stage investments
Compound interest is often associated with savings accounts, bonds and other fixed-income investments. However, the principle of compounding benefits early-stage investors, too.
In particular, angels and other early-stage investors can get a return from a successful exit (e.g., acquisition or IPO) and reinvest those profits into new startups.
For instance, suppose an investor places £10,000 into a startup and makes an exit in Year 5, leaving with £50,000. If that £50,000 is re-invested into other early-stage companies, then the amount could grow to £250,000 over the following five years.
Although the money has “moved” more than cash inside a savings account, the reinvestment of gains is akin to interest-on-interest.
The potential for compounding interest can be even greater for investors with a longer time horizon. Startups might take 5+ years to mature, and a high-growth company could deliver outsized returns (e.g., 10x+), which could multiply an early investment significantly.
Equity appreciation
Angels sometimes overlook the value of compound interest because the nature of investing (for them) typically involves holding equity stakes in private companies.
This does not generate “interest” in the traditional sense. However, there can be a compounding value of growth metrics like revenue, user base and valuation.
Given the growth potential of many startups, an angel’s equity stake could grow exponentially as the company grows. For instance, an early investment at low valuations (e.g., £1M) could rise by 100x (or more) if the company hits a £100M+ valuation.
Compound interest for early-stage investors isn’t just about money sitting in an account and growing slowly. There can also be non-financial compounding effects from gaining knowledge and networking.
Consider that each investment you make teaches lessons. You learn what questions you didn’t ask during the due diligence process. You get better at spotting “red flags” in business models, founders or markets. Over time, your pattern recognition begins to snowball.
Each founder you back also adds to your network, and each exit builds your reputation, leading to better deal flow. Together, this amounts to the compounding of intangible assets, translating into better opportunities and returns over time.
Applying the principles
How can you better enjoy the benefits of compound interest as an early-stage investor?
For angels and other startup investors, this is more about adopting a compounding mindset than earning traditional “interest.”
For instance, when you get a win (e.g. an exit or secondary sale), think twice before cashing out and stopping. Ask yourself, could I recycle that capital into new startups or funds?
This changes your thinking so you treat your portfolio like a flywheel: each exit fuels the next batch of investments. You can amplify this by focusing on spaces you understand or are close to (e.g., your industry, networks).
By building area-specific knowledge, you improve your chance of making smarter bets, helping you enhance your signal-to-noise ratio.
To improve your “sharp eye” in other niches, consider joining a professional network (like ours at Bure Valley Group!) where you can rub shoulders with investors with expertise in other areas.
Invitation
Remember, compounding only works if you give it time. Think in 10+ year cycles, not just 1–2 year returns.
Want to speak to us about our early-stage opportunities here at our exclusive investor network? Get in touch today to explore our startup projects here at Bure Valley Group.
