The positive aspect of startup investing is that you are putting your money into a new business which will be contributing to job creation and potentially providing you with a reward for investing in a company that could go on to became highly successful and established.
It is definitely not unheard of to yield a return of anywhere between 5 and 100 times your original investment when you come to sell your shares, but of course there is always risk associated with reward and picking the winners from the losers is not always that easy.
A proven strategy for helping to reduce your exposure to risk is to limit your investment to domain that you know and have experience of. Understanding the specific market that the startup is operating in will help give you a better perspective on their chances of success and you also verify that the business has a credible and scalable plan for expansion, so that you can get your money back when that next level is reached.
Leave no stone unturned
Diligence is the key word here. You should take the time to drill into the track record of all of the people who are being entrusted with taking the business forward, as their track record is mostly all you have with a startup scenario and one of the few reliable guides to how they will fare with your money.
Diversification is an important investment strategy anyway, but it is particularly relevant when you are considering investing in startups.
Multiple investments in different companies rather than one large investment in just one, should increase your chances of success and reduce your risk. It will also mean that you will not be completely knocked out if one of the startups doesn’t make the grade.
We look at crowdfunding in greater detail elsewhere on the site but the essence of crowdfunding is safety in numbers, and this is a good way to diversify across many different startup opportunities.
Check the financial projections
Many startups are asked to provide cash flow projections for up to 5 years ahead in order to demonstrate where they think the business is likely to be and how much money they think they will spend and make.
It is notoriously difficult to make accurate projections, but checking the financial projections provided by a startup will help you get a sense of how achievable their ambitions are and whether you want to invest in them.
Check legal paperwork
It is very important to confirm that all the legal documents are correct and that the deal and the company is structured in the way that you expect it to be.
It is definitely worth investing some of your money in getting a lawyer to check anything you are not sure about and verify that the deal agreed and percentage share of the business is written down and agreed by all parties as being correct.
Startups can often be about instinct when deciding whether to invest but it never hurts to be cautious and even walk away from a deal if it doesn’t feel right.
This cautionary note should not deter investors from putting their money into startups, provided it is money they can afford to lose.