Can you make money investing in startups? Yes, you can! In this article, we’ll show you how to increase your chances of success with startup investing.
Decades ago, no one would have predicted that Microsoft would become one of the biggest technology companies someday. Today, the tech giant is valued at $1.58 billion at less than $210 per share (as of September 16, 2020).
Imagine what your investments would be like today had you invested in Microsoft a long time ago? For sure, the risk of losing money will still be there. But the huge returns would loom above any risks in the investments.
And that’s where the beauty of startup investing lies. It’s all about identifying opportunities when you see them, studying the metrics, and weighing the risks versus the rewards.
Investing in startups is a strategy long used by financially intelligent and wealthy individuals. They let their money work hard for them, not the other way around.
Thanks to the Jumpstart Our Business Startups Act (JOBS), it’s now easier for startups to raise funding. It also allows small-time investors a chance to invest in early-stage startups with minimal regulatory requirements.
Which brings us to this—how does one invest in startups and profit from it? Interestingly enough, we can shed light on what startup investing entails so you can decide if adding them to your investment portfolio is a sound choice. Here goes.
Startup Investing: The Basics
Before we start, it’s important to understand that investing in emerging startups is extremely risky. Most startups fail, and investors may risk losing their hard-earned money.
Does this mean you shouldn’t invest in high-growth startups at all? The answer depends on you as an investor and what your goals are for startup investing. If you’re looking to generate a high return and diversify your portfolio, then yes, investing in startups can be a lucrative option. With calculated planning, your startup investments may be profitable.
Keep in mind that ownership in startups is typically not traded like a stock. Expect to keep these investments in your portfolio for a while. Or, wait until they go public or get bought out by their large companies.
As an investor, you can either be an:
- Angel investor – individuals with $200,000 minimum income or those with more than $1 million net worth. Generally, angels fund early-stage startups or those who don’t qualify for venture capital funding.
- Venture Capitalist – managed through a venture capital firm, venture capital can be from individuals, investment banks, financial institutions, or private entities. VC funding is often short-lived and their exit strategies include Initial Public Offering (IPO), acquisitions, or selling the shares directly to other investors.
- Personal Investors – Startup owners can tap their family members, friends, or acquaintances to invest in their company. Make sure to check legal limitations if you want to be this type of investor.
- Peer-to-peer lenders – individuals or groups that provide capital to startups or small businesses. Examples of websites that facilitate P2P lending are Lending Club and Prosper.
- Banks – an old-school source of funding for all types of businesses. They grant loans to loan seekers in exchange for collateral. Established companies often prefer to generate capital through banks.
How to Invest in Startup?
Take note, there are different strategies in startup investing to help you boost returns. We recommend these steps.
Perform Due Diligence
Investing in any business requires investors to perform due diligence. We can’t stress enough how crucial it is to review or examine a potential investment before you sign the agreement.
Make sure to audit the startup’s financial records, research about the founders, assess if their products or services have the solution to an existing market problem. The more data you can gather about the company, the better your investment decision will be.
Choice of Industry
Yes, your choice of industry and target market matters, too. Some industries may be ripe at a certain time or market condition. Currently, e-commerce remains one of the most rapidly growing industries in the world. More consumers now prefer to shop online. Additionally, e-commerce revenues are set to grow to $6.54 trillion by 2022.
Industries like e-commerce are popular because it answers the consumers’ need for shopping convenience. Make sure that you’re up-to-speed with the latest market trends in business.
Also, your experience and knowledge in an industry can help in your investment choice. Say, you have a background in banking. Your expertise in this industry will be valuable when you decide to invest in FinTech startups. Invest in a startup where you can make use of your expertise.
Diversify Investment Portfolio
As an investor, you may want to diversify your startup investments. It means having two or more startups in your portfolio. Doing so ensures your odds of winning will be higher compared to just investing in one startup.
Also, diversification entails keeping a portfolio of startups from different industries. You can diversify them based on the stages they are on, from early-stage to late stage.
Another great strategy for a diversified portfolio is to use online investment platforms. WeFunder, AngelList, SeedInvest, and Republic are a few of the best platforms for startup investing.
Your journey to startup investing doesn’t end after you’ve invested. This is only the beginning. Essentially, make sure to monitor your investment portfolio regularly. Check their financial and operational performance.
So, don’t just provide the capital. Strengthen the relationship with the startup owners by mentoring them. Your involvement might be the help they need to run their startups more profitably.
Look for the Best Investment Opportunities
Startups are unique in the sense that their risky nature attracts higher returns. Depending on the investor, these steep rewards can make the investments worthwhile.
Hence, it’s essential to do all the legwork before acting on any investment decision. Perform diversification, market research, and due diligence when investing in high-growth startups. Go beyond the hype and examine these startups from a holistic viewpoint.
The good news is that startup investing is no longer an arena reserved for big companies and the financially elite. Today, individual investors from all backgrounds have vast access to investment opportunities.
If you need help with your investment strategies, Full Scale founders Matt DeCoursey and Matt Watson can teach you how. They even host a Startup Hustle podcast that discusses everything about building a startup.
They have the experience, expertise, and network to help you strike a startup gold mine. Send us a message to reserve your seat with Matt and Watson.