Understanding how to invest in startups is the first step to having a huge stake when the company starts generating profit. Imagine if you had invested in Apple before its IPO in December 1980, then your investment would be worth a lot today.
Similarly, there are a lot of startups with high prospects but are in need of funding that will serve as a catalyst in their growth.
While it may be true that startups are full of uncertainties and risks, there are still ways to minimize these risks and receive returns for your money in due time. There are platforms designed to present you with only the best of startups that have high growth potential.
So, do you have questions like; Are there any advantages of investing in startups? How do I even Invest In startups? How do I make money from my Investments in Startups?
This article will give answers to your questions while providing you with a step-by-step guide on how to invest in startups.
But first let’s discuss how to find these startups.
Discovering Startups to Invest In
There are a lot of startups coming up every year but it takes a whole lot to discover those that will eventually succeed.
While watching Shark Tank, I observed that not all startups received investments. The investors, together with their preferences and years of experience were able to discern which business idea is scalable and which is not.
So, if you will like to know where these scalable startups are, here are some ways to find startups that you can invest in.
After all, their presence can help you decide if it’s worth your money or not.
#1. Direct Pitch
Just like in Shark Tank, you can decide to meet start-up owners and have them pitch their idea to you.
Also, during large conferences or entrepreneurial summits, some entrepreneurs can meet you, and pitch their idea to you. It could also be over a cup of coffee.
#2. Investor Platforms
There are platforms designed to let investors connect with startups that you can invest in. You can buy, sell, and hold funds for startups you decide to invest in.
#3. Casual Means
You can be having a conversation with a friend and suddenly (s)he mentions a startup company with prospects to generate returns in a short period of time.
You can make use of that information and do your research to have thorough knowledge about the business.
Now, that you know how to find the right startups to invest in, there are still some criteria to meet before you invest. Let’s look at them below.
About Choosing The Right Startup
Choosing the right startup to invest in is just as important as the investment itself. This is because you will be committing your money into the startup for a long time irrespective of its niche.
Also, the first five years of a startup isn’t entirely guaranteed to bring you returns over your money. The more reason you have to choose the right company for investment.
Here are some ways to help you choose the right startup.
#1. Meet the Owners
Every startup was once someone’s idea before it became a reality. Most importantly, you are not investing just into the business alone, you are investing in the people running the business.
Moreso, the startup stage is the most difficult stage of a business, at the same time it’s very crucial to the growth of a business. Without a committed leader or founder, to manage the business in the startup stage, the business has a high chance of failing, and that means you lose your money.
Set up a meeting with the founders and have a conversation with them. That way you will be able to find out if they really have a vision they are obsessed with or a business plan to help them grow.
Also, find out if they have the right expertise to run the business. If they don’t, are they willing to outsource? If they’d outsource, how do they intend to manage them? Ensure you critically think through these processes before you decide to invest.
Additionally, confirm that you will regularly receive updates on the progress of the business whether in good times or bad.
#2. Find Out Market Adoption
Another factor that should influence your decision in investing in startups is the market adoption of the product.
We all know that during a pitch, it’s majorly estimates and assumptions that are being presented. Don’t get me wrong, it’s alright to do so. But because your money is involved, you need to know if the product is gradually seeping into the market.
To some investors, this may not really matter since they are just startups. But if in 3 years of business, the product isn’t being used by at least 1% of the market, does it require an investment or a good marketing strategy?
Good research is paramount!
#3. Make Sure All of You Is In Sync With The Investment
Nothing hurts as much as looking at a failed investment and knowing that you really weren’t sure about the investment in the first place.
Invest in a startup that you are certain of. after meeting the owners and knowing the market adoption of the product, ensure your decision is still strong within you before going ahead.
No investment is entirely risk-free regardless of if you are still certain of your decision. But you can reduce the risk to a certain level if it is in sync with your guts.
That way you can be 100% responsible for the outcome of the investment.
#4. Go Through The Legal Papers
Startups are generally so promising and at the same time money hungry. Some tend to replace the right processes of a business with money. To them, as long as there is money to run the business, no problem can be incurred.
So ensure you look to see if the company is legally recognized, and incorporated. Check if there is a proper guideline to the issuance of shares, leases, and contracts.
When you want to invest, go with an open mind, ask all questions you can ask, and ensure you confirm and double-check by yourself.
#5. Understand the Risks
Understand the risks of the investment you are willing to take properly. No investment is risk-free. Even the low-risk stocks have some degree of risks attached to it.
Startups are generally high-risk stocks, and thus require patient and bold investors who understand that they may not get returns for their money in the first year or two or even ten years.
You should be prepared to lose your money as an investor, so it’s best to not put all your eggs in one basket. If you are a new investor, don’t start your investment journey by investing in a startup. That is a bad decision to make.
Instead of investing in one startup, spread it across and invest in 10 or 15 if you can. At least 2 out of the number will generate returns for you.
Your start-up investment shouldn’t be all you rely on. It’s very risky.
#6. Analyze the Numbers Yourself
A startup’s valuation is usually hypothetical. Anybody can guess it because it’s a startup; including the management. Ask the company how much it has raised, and how much the shares are worth.
This way you can be sure to do a proper and accurate calculation of what your share may be worth. If the company has a good record of revenue generated, it’s a good indicator of how well the management runs the business.
Bonus Tip: If you don’t have the patience to invest in a startup and wait till your money begins to generate returns, you can consider lending – in form of a business loan.
This way, you are sure that you will get your money back with the interest rate that is agreed upon. Debt can be a straight forward way to get your money back.
What To Avoid In Startup Companies?
Majority of startup companies always have a lot to promise at first. However, running a business isn’t as easy as it sounds.
With time, those who lack the right business, growth, and marketing strategy will eventually fall off while the better ones will prevail. After all, the race is for the swift. And being swift is directly proportional to having the right knowledge needed at the right time.
So, here is a list of red flags to look out for when deciding to invest in startup companies.
#1. Excessively Promising Companies
It’s justified that startup companies hype their prospects to become appealing in the eyes of the investor. But a good investor knows when the prospects are going overboard and have become unrealistic.
One of the rules to business is saying what you can afford to do. Anything outside this gives you off as an entrepreneur that lacks credibility.
So as an investor, be wary of companies that dwell on features and not the benefits. After all, benefits drive the money by selling the product.
#2. Getting Discouraged By The Numbers
In as much as numbers helps you come up with a decision to invest or not, do not entirely rely on it. Startup companies for the first 5 years of operation do not have convincing numbers yet.
Instead, they present you with prospects of what the business is likely to become if you can invest your money.
Often times, those numbers are what they see themselves recording with time. A good investor is refuses to be discouraged by the numbers so long as its a business with high scalability.
#3. Risky Niches
If the startup company you want to invest in operates in a niche that is not even stable, then you should reconsider your investment. Industries like cryptocurrencies still have federal laws that ban them from operating in certain countries.
I don’t understand how a startup will want to make money and build stability while operating in a niche that goes against the law. That’s a risky investment, one that wouldn’t yield so much in the long run.
Conversely, there are still low-risk, high-reward stocks you can choose to invest in if you have a problem deciding which investment to make.
Having established what to avoid when deciding to invest in startups, let’s look at how to invest in startups properly. Is there a rigorous procedure or is it just in straight simple steps? We’ll find out shortly.
How To Invest In Startups
They say little drops of water form an ocean. It’s the gradual steps that you take that will eventually lead you to investing in a startup.
I have divided the processes into two:
Personal Investment Strategy
These are the several investment strategies you employ to ensure you maximize your investment.
The first step to maximize your start-up investment is to do your research. If you’ve been reading from beginning till now, you will undersand that research is the core of every investment.
Know what you are putting your money into. Warren Buffet, a renowned investor says ” Never invest in something you cannot understand’.
So do proper research, you don’t want to invest your money in mere hearsay.
#2. Run a portfolio check
Be sure that the investment will diversify your portfolio. Also, Invest in more startups to increase your chance of getting returns.
#3. Invest Only what you can afford to lose
These are risky investments, you may not receive dividends for years. Be sure you’re okay with that.
4. Reserve a portion of capital for follow-on rounds
While contacting your broker, ensure you tell them the amount you want to invest. Don’t go all in just yet. Reserve some for follow-on to maybe boost your investment or save you from losing money. Don’t forget, it’s a startup, almost nothing is certain yet.
Through Investing Platforms – Crowdfunding
Crowdfunding is a process of raising capital for a business through the collective efforts of family, friends, customers, and/or individual investors. In other words, when a “crowd” wants to fund a project.
Thus, crowdfunding platforms works by providing you with startup companies or businesses that have been pre-screened and possess high success rate. You can also connect with other investors that are willing to invest in start-ups.
There are several crowdfunding platforms that promises to provide you with thoroughly screened startup companies you can invest in, but we’ve selected the best of them to discuss.
Hence, here are some crowdfunding platforms to check.
SeedInvest is a crowdfunding platform that allows everyone to invest in startups that have been pre-screened for potential viability. Although SeedInvest receives applications from a lot of startups, only less than 1% are accepted.
SeedInvest says it has over 300,000 investors that have funded over 200 startups.
When you sign up on SeedInvest as an investor, you will receive a list of companies seeking funding.
Each company has a different minimum investment amount that they need and a deadline to raise such funds. Remember, the companies have already been pre-screened, so you are sure of seeing the best of the best.
One of the outstanding features of SeedInvest is the “auto-Invest” option. It helps you diversify your portfolio by providing you with a minimum investment option of $200, and a 2% processing fee.
Click on the button below to learn more about SeedInvest.
MicroVentures is an investment bank that allows investors of all kinds – accredited and non-accredited to invest in startups for as low as $100.
The company has a lot of startups you can choose to invest in, ranging from digital marketing companies to data storage, and tradeshow companies.
MicroVentures says it has over 110,000 investors who have invested over $220m in several startup companies.
Also, MicroVentures is very careful about the type of startup companies they proffer to investors. These startups often present a detailed document on how the investment will be used to boost the business, and in some cases offer incentives to the investors.
Recently, the company allowed its users to invest in already huge companies like Slack, and Airbnb.
To learn more about MicroVentures, click the button below
Wefunder is one of the key players in the industry of crowdfunding. Their option “Kickstarter for Investing” allows investors to invest as little as $100 in a startup irrespective of its niche.
Every startup has its investment target. And if they don’t meet it before the deadline, Wefunder refunds the money to the investor.
SEC and FINRA regulate Wefunder. Hence, your money is kept in an escrow account until the startup company reaches its investment target. After which, it is then transferred to the company.
Wefunder has helped to invest over $185 in startups with different niches. You too can be a part, click the button below to get started.
AngelList is an investing platform for startups. The platform offers startups from (seed to post IPO) an opportunity to secure funding and angel investors -high net individuals who invest their money in an entrepreneurial company.
Additionally, the platform has different features designed for different purposes. AngelList venture is for venture investing, AngelList Talent is for job search, a place that houses over 100,00 tech and startup jobs where you can apply.
The good side to AngelList is that it lets you build your network to increase your chances of securing funding.
There’s a whole lot more on the AngelList platform, click the button to learn them.
Gust is unlike other investing platforms I have discussed above. It is a SaaS platform designed for founding, operating, and investing in scalable, high-growth companies.
The platform offers a wide range of accredited tools that entrepreneurs, angel investors, and venture funds need.
Whether you are a startup company or an investor either seeking to invest or to connect with other investors, you can browse through the individual offerings of other investors, discuss deals, monitor investments and share your intended investment with others
Gust says that it has helped over 850,000 startups to connect to over 85,000 investments.
Find out more by clicking the button below.
Investment is a very vital part of wealth creation. So it’s important you thoroughly do your research before investing in any business including a startup.
Bear in mind that you cannot trade your shares until the startup decides to go public. The more reason you should know how to properly invest in startups to avoid losing your money.
I hope this article helps you.