Have some cash lying around? Want to be an investor? Tread carefully. Startups are notorious for their high failure rates and so are, by default, a high risk, high return investment. For those who have flirted with the idea of investing in a startup, we’ve consolidated tips and best practices from experts to mitigate the risk of losing your hard-earned cash. If you’re really itching to invest, do so as wisely as possible.
1 Be certain
If you’re not completely sure you’re willing to risk your investment, then maybe don’t invest in a startup at all. There are plenty of other ways to use your money to make more money, including stocks in larger companies that will perhaps bring in less revenue, but with a significantly smaller risk.
2 Set a budget
If you’ve made the decision that you’re willing to take the risk, decide exactly how much you are willing to gamble. Give yourself a strict budget and stick to it. Usually that means a single digit percentage, or perhaps as much as 10 percent, of your assets. Depending on wealth, some thrill seekers may venture in with more, but the bottom line is: You have to be ready to lose it all.
3 Diversify your investments
Plenty of startups go under and take investments with them. Investing in a single startup is quite risky. By diversifying and investing in different companies, you spread the risk. So even if only one or two of them succeed, you’ll still likely make a profit.
4 Pace yourself
It can also be helpful to diversify over time. For example, some people choose to invest in one or two startups a year for a few years. Depending on your budget, you could choose one startup each year that you think is most likely to succeed.
5 Be patient
If you happen to invest in a startup that actually succeeds, it will still take a very long time for the business to become profitable. Plan accordingly. It’s not likely you’ll see any returns before at least five to seven years, and sometimes longer. Whatever you do, don’t harass the startup with money issues. They already have enough pressure to deal with, and the majority are already very conscious that this is not their money.
6 No Fear of Missing Out (FOMO)
It’s really important to be well informed about a startup before investing in it, and if you don’t have the time to do solid research, it’s better to pass. You may miss an opportunity by taking too much time to decide, but it’s probably better to miss out than choosing a really bad investment because you had FOMO and rushed into a decision.
7 Invest where the experts are
A young investor may not know where to invest so it might be a good idea to look around and see what the experts are doing. If you see seasoned investors interested in a company chances are it’s a good opportunity. However, beware, as you need to check their reasoning. For example, are they only investing because it’s a friend or family member’s business? Or perhaps, they’ve just injected more capital into a startup that’s starting to fail, trying to revive it.
8 Beware of adverse selection
If you’re a new investor and are being approached about investing in a startup, be aware that sometimes investment opportunities come up when the startup has been rejected by larger, more prominent investors.
9 Join a network
Angel networks can be a great way to invest while mitigating risk. The groups pool capital and do solid research and valuation, advise the startups before voting to choose what startups to fund. This is a great way to find the fittest startups and safely go into funding with lesser risk.
10 Ask the experts
Before investing, talk to an expert in the field of the startup to get their take. If it’s a tech company, talk to a techie that knows the details of the business and ask if they see added value in the startup’s mission. A finance person can help with the investment part but it’s helpful to consult with someone who very specifically understands the technical aspects of the startup’s work.
11 Look at the team
Investing in the right team can be as important as in the right idea. Factors like how well the co-founders get along, their motivation, how well distributed the work is as well as their knowledge of their market are all vital to their company.
12 Invest in the right ideas
Look at the work of the startup and ask yourself what it’s adding to the community. The needs of each market and culture are different but socially impactful startups that address those needs are not only a good financial investment but a long-term investment into that society. It’s responsible to not just think about making a profit, but really investing in the future.
Executive Life will not be held accountable
for any investments gone awry.