With the new regulations passed by the Securities and Exchange Commission, anyone with an interest in investing in a startup can now do so. Whether you have millions of dollars to invest or only a few hundred, there are plenty of different kinds of startups seeking seed money for their businesses.
When you start to consider what kinds of startups to invest in, it’s important to ask yourself a few questions. Once you’ve asked yourself these questions, you can start looking at startup companies that match your level of comfort. These companies should meet certain guidelines before you invest any capital or make any agreements for future funding.
What are your interests?
If you’re going to invest in startups for the first time, you should start with businesses that interest you. Invest in startups that you will actively want to see grow and improve. You will be able to be an advocate without feeling like you’re pushing something you don’t believe in.
Where is your expertise?
Look for businesses that not only interest you but that you have experience and knowledge of. These can be industries that you currently work in or that you have researched or worked in in the past. The more you know about the market, the customer, the business model, and the distribution channels, the more likely you are to make a sound investment.
Most experienced investors choose two or three industries to focus their investments on. This allows them to intimately learn the ins and outs of the market and see gaps that these new startups can take advantage of.
How much are you willing to invest?
The kinds of startups you invest in may depend heavily on how much capital you are willing to invest. The same question posed another way is, “how much are you willing to lose?” You should never invest more money than you are able to lose.
How involved do you want to be?
Do you want to make your investment and then let the company manage itself however it wants or do you want to play a larger management role in the companies you invest in?
Some companies are specifically looking for advice and help from people who have experience in their industry. Others are simply looking for silent investors who will leave the company to use their money to help them grow.
What experience do the founders have?
One of the most critical factors in the success of a startup are the people behind the business. Be sure to do your research and only invest in companies that have an experienced team.
Have the founders worked in startups before? What successes have they had in the industry? Are the right people doing the right jobs? Are there any glaring holes in the management team that needs to be filled?
These are all questions you need to ask of the founders of any startup that you plan on investing in.
What is their monetization strategy?
How is the company making money? Is the price of their products and services competitive? How are they retaining customers and gaining new ones?
All of these questions should be very simple for the founders to answer. There is not point in investing in a company that does not have a clear monetization strategy.
What is the size of the market?
As a newbie startup investor, you want to invest in companies that are in large markets. There should be plenty of competition and plenty of customers. The startup should have a clear understanding of the market size as well as what their unique selling point is that will help them stand out from the competition.
If the market is new or emerging, then the company should be able to show how big the market is expected to get and what is driving the growth of the market.
Do they have any indication that they are offering something people want?
If the company hasn’t begun trading yet, what research do they have that proves they are selling something that people are actually going to buy? Make sure that if you are going to invest in a startup company, that they are able to show that they have a product or service that is going to sell.
Who else is investing?
Are there more experienced investors willing to take a risk on this company? When you just start out it’s a good idea to invest alongside seasoned investors. They may be able to offer you advice as well as become contacts for future investments.
Should I invest in a startup?
While just about anyone can invest in startups these days, that doesn’t necessarily mean that everyone should. Investing in startups has very high risks and if you are not willing to lose that money, investing in a startup probably isn’t the best use of your capital.
If you are, however, willing to take some big risks, there can be very high rewards.
Diversify your investments
Don’t simply put all of your savings into startups. Start with five percent of your investment funds. Some pension and endowment funds have even begun investing a small percentage of their funds into private equity investments. Many feel that this small amount reduces risk while potentially reaping very large rewards.
Invest in the future
Investing in startups gives you the opportunity to invest in innovation and to feel a sense of ownership in the companies that you are investing in. Every year startup investors help to create life-changing technologies that wouldn’t otherwise have been possible without their capital.
If you are looking for a place to invest your money and you also want to make a difference in a certain industry or business sector, investing in a startup that is pushing boundaries in that field may be exactly the way to do it.
Make a debt investment
If you’re not sure whether you should invest in a startup, begin by making a debt investment. It’s basically a loan that you give the company. They will pay you back that loan with an agreed interest rate.
Many companies would be happy to take this type of investment as startup companies find it difficult to get loans from banks when they are just starting out. In order to get a business loan, a company has to show proven financials for up to three years, something many early-stage companies cannot give.
These types of investments allow you to dip your toes in the startup scene without taking a huge risk on losing everything.
Invest with an angel group
An angel group is a group of investors that get together to hear pitches from early-stage startups. They all have experience and knowledge of specific industries. Together they decide what companies to invest in.
This is a great way to get started with investing in startup companies because it allows you to bounce your ideas off of other investors. You can all discuss a company’s merits and together you can do more thorough research in less time than if you were to go it alone.
Save some capital for another round
Another great way to invest in a startup without risking everything is to invest small amounts at different stages. Startups need injections of cash throughout their beginning stages. By drip feeding your investment, you are able to better judge how the company is growing.
If at round two or three of financing you feel that the company isn’t performing as well as you originally thought, you no longer have to continue investing your capital into the business. You reduce your risk of losing it all while still being able to begin investing in startup companies.
Don’t rush into anything
Be sure that you do all of your research before committing to a project. It can be exciting to find a company that you get a good gut feeling about, but make sure that you do your due diligence.
Make sure that the founders are experienced, that the idea is sound, that the company has a clear path from startup to a scalable company, and that you clearly understand the industry you are putting your money into.
Do not invest your money into a project just because a few other investors are doing it. Investment from experienced investors doesn’t automatically equal a successful company. You should still be absolutely sure it’s the right investment for you.
