It is true that investing in a start-up comes with risks. Nevertheless, when risks are taken and businesses grow, both founders and investors win financially, as well as on a personal level. As an investor, you get the reward of being part of a new business that could potentially become the next big thing and also benefit from capital formation.
Before being able to reap the benefits of the investment, it is important to gain knowledge about what it means to contribute into the early stage of a business.
Here are some of the most important things you will need to consider before investing in a start-up:
1. Learn about the industry you wish to invest in
Be sure you invest in something you are familiar with. Even though you are supporting an already established business idea, it is still important for investors to know the field they are getting into. Peter Lynch, one of the most successful and well-known investors of all time, emphasised the importance of investing in what you know. Understanding the business sector will decrease risks of failure and will offer you a better perspective of the start-up long-run rate of success.
2. Analyse the financial reports
When helping a start-up raise capital, it also important to have a prior look at its current assets and liabilities. Analyse the valuation relative to comparable companies based on multiple factors, such as revenue, net income, growth rate, risk profile, and capital structure. Consequently, you will have a better idea on the actual financial state of the start-up, and if it correlates with its future roadmap.
“Never invest in any company before you’ve done the homework on the company’s earnings prospects, financial condition, competitive position, plans for expansion, and so forth.” – Peter Lynch
3. Search for diversity
Even though you know the industry you are looking to invest in, it is not always easy to find a start-up opportunity that suits your interests. One of the best ways to increase your chances of finding the right investment opportunity for you is to explore online investment platforms that feature prescreened companies. Investment platforms will offer you a wide array of new business deals and will keep you up to date with the latest trends.
4. Plan ahead
As it has already been established that every investment carries risks, it is also essential to see your investment as a long-time plan. Sometimes benefits take a long time to come or you could find yourself in a difficult position to get your initial investment back. This is why, when things don’t go according to the initial plan, relying on an exit strategy could make things less complicated. Therefore, before investing, also think about how you could eventually liquidate your initial investment.
5. Be patient
Patience is required throughout the funding round, but especially after the round closes and investors expect to see positive results. Once you are a shareholder, make sure that you will receive updates from the company. As part of the company, you will share in the excitement as the founders scale the business, but success is never guaranteed. Uncertainty is part of the investment world, so patience is required, as the results may come later than expected.
Whether you are new into the world of investment or quite familiar with it, thinking about these general rules before investing in a start-up will always come in handy. If you choose an online investment platform, start by talking to the investor relations team. They will help you understand the process and talk you through their range of pitches. If you want to dig deeper and get involved in the business, they can help you find ways to work with more experienced investors or attend pitching events and masterclasses, if they offer such opportunities.
Keep in mind to build a plan and look for an investment opportunity that suits your expectations.
The above references an opinion and is for educational information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice. Investing in any business involves risks, including illiquidity, lack of dividends, loss of investment and dilution, and it should be done only as part of a diversified portfolio. Please click here to read the full risk warning.