Have you invested in a startup?

Startup Investing: Everything You Need To Know

If you're a medium or small investor, you've probably never considered investing in a startup: too risky, too difficult, too big a deal. That may have been true a few years ago, but now everything has gotten easier. There are platforms dedicated to the marriage between startups and potential investors and you know where to go to discover new and interesting startups: Wefunder, SeedInvest, StartEngine, Republic, AngeList, you just have to decide.

Now we come to the question of how to choose the right startup. This is a big problem because startup investing is certainly a risky business.

 

Startup Investing: What You Need To Know Before You Get Started

 

First of all, we think it is important to clarify some terms. A startup is a very young private company that is expected to grow very quickly. When you invest in a startup, you buy a stake in the company and rights to its future profits. This portion is called "equity". Of course, if the company fails, you lose your money completely. Even if you want to sell your shares, it is not so easy with startups because these types of shares have low liquidity. You win when you sell your stocks on "liquidity events," which are opportunities to convert money frozen in stocks into cash. Common liquidity events are takeovers or IPOs (Initial Public Offerings, when the startup “goes public”).

You can try selling your shares before going public, but the company may refuse. Some companies choose never to go public. In this case, there won't be an IPO, but if the company makes a lot of profit it can decide to buy back its shares or pay dividends. Of course, you know that investing in a startup is an extremely risky but potentially rewarding endeavor. So if you choose to do this, consider the risk of not getting your money back.

 

Venture capital vs. angel capital vs. crowdfunding

 

Now let's try to understand what kind of investor you are. Do you have a HUGE amount of money to invest? If not, then you cannot be a venture capitalist. This type of investor usually puts large sums of money on the startups they want to fund (we're talking more than $ 1 million here, the median being around 18 million) and in return they get a spot or more than one spot on the company's board of directors. In contrast, angel investors are usually private investors who put smaller amounts of money on the table (starting at around $ 10,000). In either case, to be an angel you should be an "accredited investor" (for example, to be an angel you should make at least $ 200,000 a year and have a net worth of $ 1 million or more). As an angel investor, you can join an angel group or an angel syndicate (like AngeList) where an experienced investor leads everyone else. Last but not least, you can finance a startup using crowdfunding. This is the easiest and least risky form of financing because you can put a really small amount into the company. Thanks to the “Jumpstart Our Business Startups Act of 2012”, some restrictive regulations fell, so that smaller investors could also buy startup shares.

 

How to choose the right startup

 

Since this is a risky business, choose carefully. First of all, you should focus on an area that you know because that will help you understand whether what the startup is doing makes sense. You should research the market (competitors, etc), look at who the other investors are (e.g. if they have a track record) and you should also have a very clear understanding of your monetization needs (do you need your money back pretty early?) And of the company's monetization strategy. Also, take a look at the company's finances and how they use the funds (e.g. if they invest the bulk of it in salaries, that wouldn't be good). Scan through the legal documents. And finally, follow your gut instinct ... that's what a real investor does, isn't it?