From Zero to Hero: A Beginner’s Guide to Investing in Startups
May 8, 2023
What steps should you take when investing in startups?
- Do background research.
- Assess your own situation.
- Understand the scope of your role.
- Know the timeframe.
- Make sure that there is a viable exit strategy.
Picture this: in five to ten years from now, the company you are investing in is soaring high like the other giants in your chosen industry. Wouldn’t it be so great to become a renowned investor like Jeff Bezos, whose 250-thousand dollar investment in Google back in 1998 has over three billion dollars in return today?
Google, notwithstanding its worldwide presence today, was once a startup. Jeff Bezos, despite his current status, was once an ordinary man.
In life, nothing starts big. If you aspire to make things happen as an investor, here’s our guide to investing in startups.
Do Background Research
Before you start your venture, it’s important to ask yourself these questions: What kind of business are you investing in? What is the industry and how congested is the market space? Is the company creating a new market (blue ocean strategy) or competing with its rivals over existing demands (red ocean strategy)?
As much as possible, conduct thorough background checks before meeting the founder in person. Make sure to read and understand the business plan as well once presented to you. Get to know the company, pay attention to its SWOT analysis, and consider the financial forecasts.
Assess Your Own Situation
You put something valuable at stake every time you invest. Therefore, it’s a must to always be prepared. Make sure that you have the right resources at hand and that you know how to properly utilize them. These considerations will depend on the type of investment that you will place in the company.
Every choice you make creates an impact on your investment portfolio, so it is crucial to understand how diversification strategy works. If one of your commitments results in a loss, will the rest—or any—of your current portfolio collection be able to back it up? The world of investment is all about risks, but it’s up to your decisions how you’re going to get through and make it worth it.
As you review your investment contract, heed the agreement and be sure to understand the investment cost that will affect your return on investment (ROI). Take note that when investing in startups, it’s common to be offered approximately 20-25 percent of their business earnings for your equity investment. Be confident in establishing what you shall be getting in return.
Understand the Scope of Your Role
As an investor, you have other things to do aside from putting money into a company. It may not be discussed very often, but if you really want to succeed, you have to make your own input that will drive opportunities to the company you are investing in.
Especially for startups, establishing a presence is hard. You can help in generating revenues by growing the company’s network and building more connections to reach potential customers or clients.
Know the Timeframe
Investment is not a lifetime process. When you invest, the timeframe has to be clear to you to measure how successful your investment has been accurately. Will you be investing in the same company for five years, ten years, or fifteen years? Knowing the timeframe will also help you gauge the increased rate of your ROI over the years.
Make Sure that There is a Viable Exit Strategy
Investment should have a definite duration. This is why we have to estimate the time frame. A clear exit strategy helps you keep your portfolio in good shape if your profit objective is met and your equity is good to be liquidated. It also helps minimize losses if you end up investing in a non-profitable company.
Besides the aforementioned reasons, there are also external factors that can affect how your chosen business runs. Laws, disastrous events, and other inevitable circumstances that may jeopardize the company you are investing in are extreme considerations that must be regarded when planning your exit strategy.
Investing, no matter the company size, has no shortcuts. It is not freestyle, either. Now that you’ve reached this part, you must be five steps closer to realizing your investment objectives.
If you want to learn more and discover where you will best fit, whether as an investor or an entrepreneur, read our tips for finding your niche in business. It may also come in handy to read our tips on how to prepare your business for a recession this 2023 and be more proactive.
Reach out to Benito Keh, a reputable entrepreneur and business expert, for more tips to kickstart your professional journey!