Things You Should Know Before Investing In Startups

by Helen Bradford on Wednesday 11 October 2017, 12:40 PM | Category: Loans & Investment| View: 590 views

Investing in a startup is a decision that shouldn't be made overnight. There are plenty of things to consider before engaging in this type of activity. Before you put any money into a new business, it is important to ask a few questions and get satisfying answers. Keep in mind that the profit is not guaranteed even if you get straight and thought-out feedback. The text below can be very helpful if you're thinking about becoming venture capitalist or investor through a crowdfunding platform.

Discuss the level of your involvement

The first matter you should discuss with the startup's CEO is the level of your involvement in their project. There are two options for you in this case. If you want to invest in the startup through a venture capital firm, keep in mind that the communication with the team behind the startup will be limited.

On the other hand, if you choose to go as an angel investor, you'll get a portion of the new company and you'll have a chance to be involved in decision-making. Your equity stake will determinate the strength of your suggestions. Of course, you'll get your share of a company if you invest via crowdfunding campaign as well, but you won't have the same kind of control as the angel investors have.

Timeline vs personal expectations

There are probably thousands of startups that will need years before making any money and returning your investment. Make sure to discuss this with the CEO and get as much information about their timeline and projections as possible. Decide for how long you're comfortable to wait and consider that decision before investing in a new startup.

A good way of predicting the time of the return is through analyzing the burn rate. Keep track of the money being spent each month and it will be very easy to determine startup's potential. If they are spending a lot of money every month, and looking for an investment to cover expenses, it is better to avoid dealing with them.

Don't forget about rate of return

Regardless of the type of investment, both VC and angel investors need to calculate the expected return on investment (ROI). When investing in a startup, your goal should be to help entrepreneurs, but you should give your best to maximize earnings as well. Manage your investment by estimating returns and see how much money will find it's way toward your bank account.

This calculation should be done annually, and it's good to know that most of the angel investors get between 30% and 40% of the annual return. While working on this matter, keep in mind all possible fees that are associated with the investment since all of that will reflect the ROI.

Consider diversification

Putting capital in just one startup can be very risky, so if you are willing to enter the world of professional investors, you should think about diversification. The more startups you get in, the greater are chances of getting money back. Of course, the most important step is to find promising startups. If you miss there, you can say goodbye to your resources. Give your best to find the balance once you got in more than one startup.

Prepare your way out

At the end, it is crucial to discuss your exit strategy. This should be done before placing any investments in the given startup. Setting the exit strategy is mandatory for any investment you may make, and especially for new businesses. You should determine the conditions of your initial investment withdrawal. That way, you can direct your capital toward another startup and additionally enrich your investment portfolio.

Final thoughts

Keep in mind that investing in the new company comes with a lot of uncertainty, and there are no guarantees when it comes to returning of investment. Because of that, make sure your decisions are thought-out thoroughly and don't forget to listen to your gut while reaching for the checkbook. Make sure to ask all important questions before investing in someone's startup so you can get a big picture, and decide upon that.




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