Investing in a startup may seem simple, but it has many details to be calculated — the cost can be high — especially regarding expectations. See below, what to consider when investing in a startup to make the right decision according to return and expectations as an investor.
the basis of everything
More than anything, investors want to see a return on their money. Investors are in the business of putting money into growing businesses so they can make a profit. If the startup can demonstrate that it will make money, let’s say that 90% of the decision is consolidated.
Let’s face it, starting a business can be expensive. Few entrepreneurs have the money available to start the game without some outside help. This is the biggest difficulty when owning a small or expanding business.
So they can seek financing through a traditional loan, microcredit or money from friends and family. If that’s not possible, this is where you (the investor) come into play, so it’s important to understand what investors typically look for before making the decision.
Being a startup investor, first, requires confidence in the hands-on management power of the hands-on. They will shape the appreciation and return on your investment. Some points are interesting to look for in the group that makes the proposal.
1. Founders’ Execution Skill
Any idea, if truly innovative, can be attractive, especially when sold by a passionate founder. A venture investor almost always focuses on the team first, but execution ability should be the first priority.
Many startups have founders who haven’t launched a venture before. Okay, but they could have shown through another experiment the ability to turn an idea into reality.
2. Team Skills
What moves a company is management, pure and simple. While factors such as risk versus reward are vital, you are not just investing in the product or service, but in the leadership and ability of the management team to execute the business plan.
Invest in nothing less than an experienced, qualified and passionate management team.
3. Market potential
Attention investors, your most important concern when considering an investment is the potential market for the business. Ask specific questions to ensure the company has a clear idea of its market share.
The founder must be able to tell what percentage of the market they plan to capture in a specific time frame and what kind of growth potential they envision.
4. Goal for 10 years
Entrepreneur’s head is a box of surprises. Founders have different goals and qualities. Some are great working in teams of up to 10, but sacrifice themselves on a team of 100.
Other founders want to scale a company for 10 years, while some get bored and want to start something new.
The investor must ensure that the agreements and terms are in place to allow for a clean exit from the founder that is not detrimental to the business.
Many great ideas run out of working capital and end up on the way. While many startups use an aggressive way to show profitability, understand how much capital or cash it will take to keep the company running when it runs into obstacles.
Investor technical analysis
1. Level of involvement
The level of involvement that comes with investing in a startup directly corresponds to the type of investment. For example, someone who invests in a startup through a venture capital firm would have limited interaction with the team that runs the startup.
With angel investments, the investor now has an equity stake in the company, which means he has the opportunity to participate in decision-making, alongside the startup’s leadership.
In comparison, an investor financing a startup’s crowdfunding campaign would also receive an equity stake, but would not have the same scope of control as an angel investor.
In short, it is important to be known and clear how much or how little involvement you would like when handing over the money to a startup.
2. Return period
For every example of instant success with a unicorn company, there are hundreds or thousands of startups that take years to make a profit—or fall apart. Investing is a long-term game, but it’s important to have a timeline projection and compare it to your personal expectations.
Check both the startup’s planning expectation and the numbers that indicate where it is. Looking at the burn rate gives a good picture, the more the startup is spending monthly, probably, the longer the payback period.
For an angel investor, it is normal to anticipate an annual return in the range of 30% to 40%. Venture capital investors, on the other hand, assume a greater degree of risk which translates into a higher expected rate of return. The term is directly linked to the type of investment made with the startup.
Having a defined exit strategy is a requirement for any investment, but it’s really important with startups. Investors should be clear about when and how they will be able to withdraw their initial investment, along with any associated gain.
A good example is the angel investor knowing at what point he can sell his shares. In conclusion, therefore, it is necessary to be aware of the time frame involved in the investment, making sure that you will be able to exit at a point that you feel comfortable with, with returns or minimizing losses.
4. Worth what is written
Although the phrase became famous in misdemeanor — the animal game — it is also important in lawful business. Everything must be documented, both the material for analysis during the due diligence period, as well as growth expectations, level of participation and time to return on investment.
Although investment in startups is directly linked to actions of mutual trust, the only way to guarantee their rights is through documents. Analyzing executive management documents can be very simple compared to the complexity of the human mind.
Think carefully and take all the points we mentioned into account to increase the chance of making the right decision when you decide to expand your investments to startups.