Top 5 tips for first-time startup investors
Are you considering investing in early-stage startups? Are you looking for the most promising startup that has the potential to become the unicorn of the industry? Great, you are at least walking in your dream path!
- But do you know how to do it?
- Where will you find startups?
- How much do you have to invest?
- How many startups do you have to select?
- How do you balance your portfolio?
- Which startups are the most promising ones?
- Are you going to be the sole investor or joining an angel group in order to mitigate risk?
If you are in the same dilemma and looking for the answers to these questions, we have got your back. We have helped several investors and business owners to run their organizations properly. As a matter of fact, many first-time startup investors don’t know where to start.
So, in this article, we will help you all the first-time investors so that they can invest properly in various business entities and earn profit as much as they want.
Tips for first-time startup investors
Below shared are some of the common tips for first-time startup investors-
Be ready to write your investments off mentally.
The first and foremost tip that we want to give all the first-timer investors is that try to be mentally strong enough to write all the investments off. Several figures and facts on the success and failures of the startups are popping out in business magazines. Some say that generally, 7 out of 10 startups fail, while others say 9 out of 10.
In addition to these thoughts, other facts are also flying around like birds in the competitive business world. Some believe that startups in accelerators are less likely to fail; however, others refute this fact. Many people also believe in the luck factor by saying that startups who have blue in their logo have a much higher success rate than startups with red in their logo. In short, the business world is still in its infancy. So, putting together all the sensible statistics in one basket is not an easy and good option.
Since the chances a startup will fail is much higher than that, it will succeed, so every investor needs to keep their back secured by looking at every alternative. To be more precise, you always need to remember that you have to face a higher chance of losing your investment than making a good amount of money by investing in early-stage startups.
Tip- The very first advice anyone should give any novice investor- please only invest money that you can miss. You should be willing to write off your investment when you start mentally.
Do proper research work on the details of every company
Did you meet the CEO of any organization? If no, then start meeting them and try to learn as much about their company. In fact, I will advise you to meet their team members and attend their 2 — minute elevator pitch. The more you will stay in contact with the team members, the more you will gain the perspective of their business goals, objectives, and visions. But here I am going to warn you simultaneously. Warning!
Let’s take a situation, you met one business owner, and you are quite impressed with the business idea, as well as their team members. In fact, your gut feeling is also tempting you to invest in their startup. So, in this situation, you have to slow down your walk. Put away your enthusiasm and look more closely at the details, and start digging the details of that company. You should look at the following question-
- Does the company in the bankruptcy stage?
- Does the company have some debts which they might not be able to repay it on time?
- Does the company has loads of small or inactive shareholders?
- Does the company has a shareholders’ agreement containing a strong anti-dilution or liquidation preference?
- How is the cap table formalized?
- Does the company own all the relevant IPs and URLs? If they have IP licenses: do these have a sufficient length and scope?
Before making any decision for your investment, you should always look for the above-mentioned questions. Well, there must be some terms that you might not be familiar with. So, if you need any help regarding those terms, you can always seek for some help from professionals like Startupr.
Another way you can opt is to find some other angel investors and ask them how they are dealing with the same problem. In short, surround yourself with the investor friends, whom you can always ask for some help.
Tip- Expanding your network is pivotal! Every company is different, and every startup has its own details that you need to understand and get a good understanding of.
Learn the new techniques for startup investing
It is too obvious that you will be well-aware of some of the common terms, normal shares, and bonds work. However, in this technological world, you need to start learning new startup investing techniques, particularly, convertibles which are becoming the norm.
So, what does this term mean? Basically, a convertible is a kind of loan which accumulates interest over time and eventually turns into shares. In this way, the investors don’t have to face that much loss if the business owners are unable to repay back.
Let’s take an example to explain this new method-
Suppose you are an investor, and you are looking for a company that wants €100.000. But this time, you will invest this much in the form of the convertible loan. So, at the time of the conversion, the valuation of the startup is €1.000.000.
And let’s suppose the business owner is unable to repay the amount. So, technically, you will be legible to hold some amount of shares in his company. And you will think that you will receive 100.000 divided by 1.000.000 = 10.00%. This is not correct!
Because when the convertibles convert into shares, the startup needs to formalize the new share section first! Due to this, the total number of shares will be increased by a new number, which has been created, meaning 1.100.000. So the total % share the investor will receive is 100.000 / 1.100.000 = 9.09%. If you want to take help in this section, you can take help from other investors or professionals who are in this field for several years.
Develop a good information flow
The next tip that you need to follow being a novice investor is to develop an excellent information flow about various companies in the market. Prepare a proper report of the listed companies. The report should contain the daily share prices of the company’s stocks, their equity, and their business goals. Generally, startups communicate with investors a little differently. There could be some chances when they are not able to portray the same picture of their business goals as they want too.
All the investors need to stay updated with the area where they want to invest in. Therefore, before making any decision for the investment process, you need to ask the startups to send over an example update about their business and make arrangements about updates that you are comfortable with. In this way, investors can familiarize themselves with those business owners with whom they want to do business.
Diversify your portfolio
As simple as that spread your portfolio as much you want. Don’t even try to throw all your hard-earned at one startup, because you don’t know how many years they are going to survive in the competition. As an investor, you should invest smaller amounts in approximately 5 to 10 companies.
No matter how good a company looks, there is a relatively higher proportion of risk that the company will fail altogether. And when you have a broader portfolio, you don’t have to fail such a great loss as compared to other investors. But don’t start investing in so many companies that you can’t keep track of them.
Tip- It’s better to start small and then look for companies that are having an excellent stand in the business world. That way, you can get more experienced, and see if you enjoy it, without exposing an enormous amount of capital.
By now, you might have an excellent idea about how you should go in flow as a novice investor in the business world. As a matter of fact, all the investors need to know the mechanisms and the risk involved in startup investing. The more you will stay updated with everything; the more rewarding your business strategy will be. For more information about the business strategy, and investing or starting a business, feel free to contact Startupr.