Investing in startups can be both rewarding and exciting. You know that by investing your money, you’re contributing to job creation and giving the consumer more choice in the marketplace.
But picking winners isn’t always easy. Within their first year, 80 percent of startups fail. That’s why it’s crucial to do everything you can to mitigate risk. You need to consider everything about the company, from the quality of the founders to the competitive landscape. The question in the back of your mind should always be whether the company can really offer something people want at a low cost.
Here are some tips when investing in a startup.
Invest In an Area You Know
Many investors make a very simple intellectual mistake. They believe that, when it comes to investing, it doesn’t matter whether or not they know the target industry. This is nonsense, and it puts them at a big disadvantage.
If you have money that is looking for a home, put it into an industry that you know well. You’ll be in a far better position to assess whether companies will be able to make a return or not if you understand the product and the business model.
Research Use of Funds
You can often get a sense of the founders’ pedigree by asking how they’ve used their funds so far. Be on the lookout for whether they’ve instituted any serious cost saving measures, like adiabatic data centre cooling.
How the startup intends to spend their new money will also provide you with valuable information. Does the founder expect to pay themselves an enormous salary just after the seed round? If they do, it’s probably best to stay away.
Look At the Track Records of the Founders
The founders are the key to success of any startup, especially early on in its life. They’re the people who will eventually develop the product so that it is in a fit state to market. Knowing more about them and what they’ve done in the past is important information. Are they the sort of people who will be able to carry a product forward? Things like their past business successes and their education can give you a sense of the value they bring.
Keep a Diversified Portfolio
Investing in startups is a notoriously risky business. The only reason people do it is the possibility of enormous returns. Once in awhile a new startup really does bring something to the market that people value.
But because of the risks, investors must be cautious. Don’t put all your eggs in one basket. Spread your risk a little by investing in multiple companies. Don’t just invest in startups either. Reduce your risk by ploughing money into bonds, stocks, shares, and base metals.
Ask About the Path to Monetisation
Startups tend to be an idealistic bunch. They have lofty goals for what their business can achieve. But actually getting a product out of the door can be tough, and many fail. Key questions need to be asked about how the startup is going to get money down the road.