Investing in start ups is risky. There’s no doubt about that. However, it can be highly rewarding. The question then becomes, how do you invest in start ups? Unless you are involved with early stage venture capital firms, there’s a lot you don’t know about startups. Read on to learn where to start.
Factors to Consider When Investing in Startups
As an investor, there are important questions you should ask before putting your money into any startup.
Exit Strategy and Timeline
When investing in a startup, you need to know how long you should expect to take before getting your money back, along with any gains you will have made. If you’ll get shares in exchange for your money, you need to know when you can sell them.
If the startup doesn’t have a clear exit strategy, you should probably bolt.
If you don’t mind waiting long for your returns, you might be okay with a timeline of ten years for getting your money back. However, some investors prefer more short term returns, with a wait time of a couple of years.
Level of Involvement
Depending on how you make your investment, you can have different levels of involvement. So, you should make your investment decisions based on how involved you want to be.
As an angel investor, you can be involved in making major decisions in the startup. However, if you invest as part of a venture capital firm or as part of a crowdfunding effort, you will have little to no control in the running of affairs in the startup.
Should You Invest in Early Stage Ventures?
Investing in early stage ventures is the most risky part of investing in startups. As an investor, you can choose to invest in startups when they have met a list of conditions that proves their viability, otherwise known as late stage startups.
Generally, these are some of the conditions that prove a startup’s viability:
- Having a considerable customer base
- Having a strong business plan
- Having a steady stream of income
- Being backed by market research
An early stage venture won’t meet any of the above conditions.
Below are some of the qualities of early stage ventures:
- They have a great business idea
- They may have a prototype of the product or service they plan to offer
- They have no revenue stream
- They might have a base of dedicated users but haven’t monetized them
When investing in early startups, one of the main factors that investors consider is the viability of the business idea. As an investor, before making a decision, you should consider the uniqueness of the product, the competitors, the potential for monetization, the industry… and so on.
You don’t want to lose your money. You should therefore do due diligence and consult with experts in a variety of fields related to the startup you are considering investing in.
Early stage venture capital firms deal almost exclusively with startups in the early stages. As a result, they are more knowledgeable on how to minimize risks.
On the flip side, if your investment goes well, there are advantages to investing early. One of the biggest ones is that you could get returns of up to a dozen times.
If you spot an early stage startup that is promising, and your due diligence says that it’s a great idea, you should definitely consider investing in an early stage startup. It might not always work out but when it does, it might be more beneficial than investing in the late stage, especially if the capital you have as an investor is not extensive.
The late stage is typically suitable for institutional investors such as hedge funds who want low risk and assured returns. But the low risk also means that there is a limit on the returns that can be made.
With early stage investments, the returns can be staggering.
