Tips How to Invest in Start-ups

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The platforms offer access to investment opportunities that are selected from pipelines of referrals, the startup ecosystem and in-bound applications. A recent startup on the site, TheCut , is an app to book barber shop appointments. Companies can even empower their own customers to hold a stake in a company they know and use. Startup investors can look for a decent return on their investment, but must also be able to stomach the inevitable risk.

Angel investors put a lot toward a project and they also accept the possibility that it may be a total loss. Putting smaller amounts of money in many companies is better than putting a lot of money in fewer. But it can be part of anyone's portfolio diversification strategy. There is efficiency in these numbers, according to Sherwood Neiss, one of the drafters of the original legislation who is now a partner at Crowdfund Capital Advisors.

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Investors are coming together, and without knowing each other, they are putting money into the companies that are taking off and avoiding those that aren't. Most of it is going to companies that are successful," he says. And while reward potential is there, it may be a ways off. Below I have some tips you might find useful.

Best STARTUP PITCH ever. Silicon Valley.

But there is one thing I would like to emphasize: Be careful when investing in startups. Although everyone can invest now: startup investing is not for everyone. Facts and figures on startup success and failures are flying around.

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Some say 7 out of 10 fails, some say 9 out of However, I dare to conclude that the chance is higher than a startup will fail than that it will succeed. Good returns on a startup portfolio come from getting a few big hits in your portfolio.

7 Tips for First-time Startup Investors

And those hits could take a while to realise, and they are relatively rare. So the first advice anyone should give you: please only invest money that you can miss. You should be willing to mentally write off your investment when you start. People who are considering a startup investment are usually familiar with how normal shares and bonds work. However, in the world of startup investing there is a range of unique financial instruments, which you will need to learn how to use. In particular, convertibles are becoming the norm.

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  8. Convertible equity or convertible loans have several advantages over regular shares or loans. Now pay attention to the next paragraph:. The conversion happens at the so-called qualifying event: usually the first major equity investment round. At this conversion, the convertible investors get the shares at the price used in this investment round.

    The interest, discount, cap and qualifying event are the basics of a convertible.

    Even if you have mastered the basics, then come the specifics! It is tempting to think that you will receive This is not correct and I will explain why. When convertibles convert into shares, the startup needs to create new shares first! So the total should be increased with the number of new shares which have to be created, meaning 1.

    After this the new investors will still need to get shares: their investment was likely the qualifying event that caused the conversion. Suppose you are extremely enthusiastic about the business idea and the team, and your gut feeling says you have to invest in this startup. This is the time to take it slow. Put away your enthusiasm and look more closely at the details. Some details that you should always look at:. You may not have heard of some of these terms before: it might sound like sorcery. You can find an experienced lawyer to help you but, again, a bill might be presented.

    A way to prevent high costs is to go and find other angels who have dealt with the same problems before.

    The definitive guide to investing in startups

    Surround yourself with investment friends whom you can ask for help. Perhaps you can get into the habit of investing alongside them. 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. Generally, a fast way to get information about a startup is reading their Information Memorandum. Not all startups produce an Info Memo. Otherwise, you will need to collect the information yourself.

    If you are used to investing in shares of listed companies, then you are used to be able to check the daily share price of a stock and all the latest news online. With startup investing, this is not possible. A more hands-on mindset is needed. At the same time, the startup has to build up a relationship with their investors. So I advise startups to send updates once a month from the beginning.

    If they are smart they will use the updates to ask for advice, introductions, and support. And if you are a smart investor you will stand ready to give that support.

    The definitive guide to investing in startups

    Please remember: even if they send monthly updates, the quality of the updates can differ per startup. Not all startups have communication or financial experts in house that can send perfectly polished financial and strategic presentations. If they would, I would wonder if they could better spend their time on the business. If you have concrete questions: ask them. As long as you are offering good ideas and being genuinely constructive your emails will be appreciated. In general: startups communicate a little differently. It is very important for you as an investor to stay updated. Before you decide to invest, you can ask the startup to send over an example update and make arrangements about updates that you are comfortable with.

    I advise investing in startups only if you think it is exciting and fun. If you want to make money fast, you would probably need to reconsider. Startup investing is a long-term thing. Most startups are cash flow negative for the first couple of years, meaning they lose more than they make. They are burning up investments, hoping to one day be able to earn money and create a profitable business. There is always a possibility to sell your startup investment before the company achieves an exit, but the liquidity is low.

    Also, if you have shares in a startup you often cannot immediately sell off your shares to anyone. It is common for the legal entities to be arranged so that you first have to offer your shares to your fellow investors. I will not go too much in detail in this blog post.