What are best practices before I invest in a startup?
Best practices before making an investment in a startup are:
- Do your due diligence.
- Make sure that the investment is discretionary capital and will not impact your financial stability if you assume a total loss on that investment
- Most importantly, be respectful of the founder’s time. An investor’s reputation is very important and if you mistreat an entrepreneur or jerk them around, others will find out, which will be a turnoff from working with you.
10 important tips for first time startup investors:
#1 Preparation is Key
First of all, the last thing you want as a new investor is to be caught short. What if you encounter the perfect project in which to invest, but you have to take time to organize your finances in order to do so? The opportunity will most likely disappear quickly, as other investors jump in and steal your thunder. It’s important that you realize the need to be ready at all times so that if the right opportunity presents itself, you’re ready to pounce and take advantage of it. Great investment opportunities do not grow on trees, so guarantee that your finances are instantly available should one arise.
#2 Know Your Limits
No successful investor should ever jeopardize their financial future for any one single investment. It is important that you are aware of your financial limits – just how far are you able to push the envelope? How much money can you invest without putting yourself into difficulty? Once you have settled on an overall amount which you are willing to investment in startup businesses, you must then weigh this against how many businesses you wish to take part in. You might want to invest all of your money in one startup that seems like a golden opportunity (high risk, high gain), on the other hand you might want to spread the risk around and broaden your portfolio by financing more than one startup at a time
#3 Be Patient
Patience is the bedrock of investment. At every juncture you must be prepared to wait for the correct moment to act. Whether it’s making the right investment or choosing when to sell your equity in a startup, patience is key. Some startups take longer than others to produce results, the trick is to know when things are being held back by an issue within the company or when things are progressing as quickly as they can.
#4 Know the Risks
It can’t be said enough – no investment is a sure thing. Of course startup investing is a great and lucrative area to take part in, but you should always be aware of the risks. There is always the chance of failure, which returns us to point #2: know your limits. As long as you understand that a startup might not reach its goals and can handle that fact financially, then you are in a great position. Also, different startups will have different levels of risk associated with them. One company in a saturated marketplace might have a harder road to traverse than another which is producing something new yet utterly desirable. Try to assess the level of risk and adjust your investment accordingly.
Startups often require different rounds of investment, and so through networking you may be presented with an opportunity to invest in a startup the second time around. Flex your social business side and get to know key players in startup investment or in a business niche you are interested in. Once you make it known that you have money to invest, they may present opportunities to you – ones which you will still have to asses. You might be able to put funds into a project that just needs that little bit extra to get it over the finishing line to a profit. Networking is a huge part of business, and it might just present you with a goldmine of investment opportunities.
#6 Silent or Hands On?
Every investor has to decide how they will interact with the company they are investing in. If you take a silent stance, then you are trusting those already in place to use the funds as they see fit to get the product or service to market. On the other hand, you might wish to be more involved and take an active role in the running of the company to safeguard your investment. The most important thing to remember is that you must maximize your talent pool. If you can genuinely contribute to the running of a company because of your skills or knowledge, then you can stipulate this before investment. On the other hand, if the people in place already are better suited to such a task then know when to bow out gracefully, and reap the rewards when they make the company a success.
#7 Use Your Knowledge
Which industry or sector do you want to invest in? This is an important decision. You can broaden your portfolio by investing in a number of niches, but it is most practical to have some knowledge of the area you are placing your finances into. By being familiar with an industry you can assess more effectively whether a startup could be a success or not in that market. Again, as we stated in point #6 – maximize your investments by knowing where best to place your talents.
#8 Embrace Third Party Services
Lastly, if you are just beginning your investment journey, it is worth looking at some third party services within startup investment. A few of the more reputable firms can help you find a startup best suited to your domain of knowledge and finances. They can also help reduce the risk by attracting other investors to the same project.