If you are looking to start investing in startups, whether you are a seasoned investor or about to support a company for the first time, there are about a million questions buzzing around your head.
No matter how seasoned you may be, if you are entering the startup world, there are some general things to be aware of. Here is how to start investing in startups.
How Can You Invest in a Startup?
Investing in a company is now easier than ever. The more traditional route to take is buying the brand’s shares in an initial public offering, also known as an IPO.
An IPO is when a private company allows members of the public to buy their shares for the first time in exchange for a share of future profits. They can be extremely lucrative, as early investors get the biggest piece of the cake when a brand makes it big. Some of the people who’ve invested in Amazon, Uber, or Facebook are millionaires today.
Crowdfunding is also a popular and highly accessible way to invest a small amount of money in a business you believe will go far. There are numerous crowdfunding websites (other than the all-popular Kickstarter) where you can find a young business to back.
The beauty of it is that you can invest as much or as little as you want to (and can afford). You don’t have to amass a fortune first and start investing later.
Note that not all startups will reach their funding goals, so there is some risk involved. However, if the business idea is popular enough, you can see a significant return on your investment over the years.
When Should You Invest in a Startup?
The main challenge is knowing when to invest in a startup. In order to maximize profits, you will need to invest in the business as early on as possible. However, at these early stages, you can’t always tell that the venture will be a success, and you certainly don’t want to end up losing all of your money.
If you are investing your savings or a disposable income, you may find it’s often too big of a risk. However, if you wait too long, you may discover that you have missed the boat for those large payouts you’ve been hoping for.
Unfortunately, there is no straightforward answer to the question. It will all come down to your individual appetite for risk and the amount of money you are ready to invest. If you have a small budget, you should be more careful and perhaps settle for a smaller but safer payout. If you have a larger budget, you may want to risk it once, as long as you ensure the shirt on your back and the roof over your head are in no danger.
Basic Startup Investing Tips: What (Not) to Do
Before you decide to back someone’s brilliant business idea, make sure you do your research and source as much information as possible. While it may sound great on paper, you may discover the founders have no idea how to make their idea a reality.
- Take a look at the funding the business has already received. Have they made any repayments yet? Who has invested in them? Is there a big financial name behind them that can guarantee success?
- Look at the market as well. Who will this startup be competing against? Will they be able to differentiate themselves and capture the attention of their audience?
- Learn as much as you can about the team. Are you looking at a serial entrepreneur, someone who has already built several successful businesses? Do the founders seem serious about taking their brand all the way? Are they experts in their fields?
- Calculate the potential return. You can use a calculator for dividends, explore the payments the business has already made, or look at similar businesses and what they’ve been able to pay out to their investors.
- Don’t rush into the investment. Take your time and think it over carefully. You may fall in love with an idea, but that does not mean you should back it with your money.
- Don’t believe everything you hear. Don’t trust the founders blindly. Ask around — about them, about the brand, about their other investors. Start making friends in the investment world and trust the judgment of neutral, experienced parties.
- Always have more than one option. Don’t fall for the first startup you like. Explore what else is out there and write down objective notes about the pros and cons of each business.
- Don’t expect to get your money back. It may take several years before you see a return on your investment, or the startup may fail altogether. Be ready to lose the money.
How to Choose a Startup to Invest in
Before you choose a startup, consider all of these “M” factors. Write down everything you can for each, instead of keeping all the facts in your head. It will help you make a logical choice.
- Management: What are the founders and the team like, and are they able to execute their strategy?
- Model: Take a look at the business model of the company. How do they plan to make money? Does their plan make sense?
- Market: How big is the market? What is the startup’s growth potential?
- Money: How much does the business need to succeed? Are they likely to be able to source that much?
- Momentum: What has the company achieved? Are they on track or lagging behind?
All of these factors are equally important, so consider them carefully before investing a dime.
Wrapping Up
Investing in a startup can be quite exciting, and you can easily start to feel like Elon Musk. However, remember to keep your cool, gather all the information you can, and do your bit to help the brand succeed. Just a bit of word-of-mouth marketing can go a very long way and make your new venture a complete success.
