Tips for investing in a new Startup
So you have found a company, something new and exciting and your tapping you wallet wanting to invest – this is great news but follow some top tips before investing. As you know any new business has higher risk of failure and this could be for many reasons including lack of market research, no marketing or simply bad management, so go over the list below and go into this with a clear head.
1. Starting out
Ok so this business needs funding, have you asked why? Is the problem you’re solving with your finances a small one, just due to lack of funds their end or is there a bigger issue, debt perhaps? Bad spending? Ask yourself why this is needed and then ask them.
2. Next stage
You have got to the bottom of why money is needed. Now think ahead: what will happen once you help the company? Is there a market for this company? You need to know your money is going to something worthy. Your investment needs to be secure.
3. The Market
For any business to succeed there has to be a place for it in the current market, why would any company begin just on a whim or dream? Sadly, many would, as they personally feel it will work but market research will be the decider on that.
Healthy competition is great as it makes a company fight for their place, but only careful analysis will show if there is true need for a newcomer or does the market have enough of such a company? Ultimately, can they compete? Do not be a busy fool, dreams are great but reality is what works.
5. The team
The brains behind the company are the organ grinder, they are what makes or breaks a company. So it’s important for any investor to get to know the creators of such a company and the other members of the team. You need to know what makes this team tick- do they have what it takes to make success and what talents they bring to the table? Business is business and you need to know what people are going to make you profit.
Having traction means that the startup already has some evidence of market adoption. This is an indicator to the investor that there is a real need out there and people are getting interested in the products or services provided. It is definitely a good sign when a startup can provide some data supporting their claims. It shows that the team is committed to move things forward and make things happen.
7. Your money
You will have a good idea why your money is needed, after all, this is why you are here. The seed has been planted and you want to know how to make it flourish but you need to dig deeper- find out exactly how it will be spent and when; you need to know that this investment will see a return and when. You have worked hard for your money so make sure it’s safe and more importantly in the right hands.
8. Time to move on
Having an exit strategy is especially important when investing in startups. Investing in one can tie up your funds for some time, depending on the business of course. Unlike companies, who are on the stock market, startup shares can not be sold as quickly and easily. As an investor, it is, therefore, important for you to lay out a plan of how to sell off your stake.
You as the investor know that there is a huge risk with a new business, so only invest what you can truly afford to lose. Going in to something new with reality by your side will keep your mind clear and eyes open. But once you know your personal risk, you need to analyse company risk, what risks are there, what could go wrong, is the team right? Weigh up risk against success. Risk can be exciting and yes of course it can pay off but be sensible at all times.
You have done careful planning and want to invest, so now comes the terms of agreement. Everyone needs to be on the same page, be happy with the deal and importantly have record. Do you know how a convertible note works? What is pre-money versus post-money valuation? What is a bond? This part requires the most knowledge from you as an investor, and unless you are an experienced investor, you definitely need to seek professional advice or co-invest with someone who knows exactly what they are doing. Your deal will also reflect what stage or situation this company is in, so put that into your thoughts and only sign when you 100% happy with offer and what you are getting from it.
Good Luck and we hope you find the right Startup for you!