Putting your money into startups produces an air of excitement because there always is the probability the new business you buy into is going to be the next Microsoft or Google. However, realistically, only a handful of businesses ever make it to that status. Most businesses will provide only modest returns, whereas other ones will fail miserably. If you have a desire to back new businesses, follow these simple rules to improve your chances of a successful investment. One good rule of thumb is to only invest funds you can afford to lose. Do not invest cash you require to meet living expenses or pay your bills.
Spread Funds Around
Instead of trying to identify the one business in a hundred which will make it big, think about investing in ten or twelve companies. If you divide the investment pool amongst several businesses, it boosts the opportunities of buying into success. The goal includes investing enough hard currency in each business that you commit to so that the startup business is assured of keeping afloat. Just as important is the building up of a personal relationship with its owners. If the organization takes off later on, you will be in a better position to help and offer support in their growth times.
Know the People
A startup is similar to any additional investment: The more you know, the better your chances of success. Even if a startup is new, the management team potentially possesses a track record. Research their past failures and successes and evaluate their possibility of turning a profit on your investment. You probably can find an abundance of information by searching local business websites and publications. Take some time to meet the management staff, speak to them personally, if possible, and gain a feel for how dedicated they are to their startup. Figure out how much they are paid, as well. The higher an executive salary, the quicker a company may burn through cash.
What Are They Selling?
The research should not stop when you have read up on the management staff. If the business is banking on a thrilling new product, figure out why the staff believes anyone will purchase it. Ideally, they already have given the product/service a restricted distribution and obtained customer feedback.
Plan Ahead
Prior to putting any money down, work out how you might expect to make a return from your investment. If it is a small private business, you may desire a share of the profits as it begins it's positive cash flow. Alternatively, it’s possible to wait until an owner takes their business public or a bigger company buys the business. It's valuable to know what the owners vision for the organization's financial future is and which avenue they can show you of how they are planning to remunerate you with interest.
In whom to invest and when
Invest in things you like and know something about. Play to your skill set and strengths. Where might you add value to this business? Remain within that experience.
Wait until startups possess an initial prototype, have proven they have the potential to become profitable and are able to scale. This is the ideal time to invest.
Do not bias yourselves to the team (or person), evaluate the data and products with as little preconception as possible. Do not overly overemphasize the idea or the people.
Make extra investments or double down as revenue is scaling, users are scaling, other experienced investors are putting more money in, unit economics are improving, and as founders are not requesting funds. A founder requesting funds is never a good sign.
Do not become bogged down in legal problems. Get those deals done quickly, cleanly, and upfront.
After you have made the investment
Do not expect to be the entrepreneur's boss. Usually, entrepreneurs do not listen to others. Trust in them to handle their own job. Keep in mind, you invested with the knowledge that the project may likely fail. You become more of a cheerleader at this juncture.
However, jot down thoughts about your companies, ideas, and thesis. It is the easiest commercial you’re able to do, and there are many chances for your voice to be heard. But the entrepreneur has a vision. Try to align and augment your thoughts and ideas with his/her vision.
Ask for month-to-month updates and ask your startups to include their report on revenue.
Regularly request a month-to-month net burn figure. If the amount cannot sustain the company for 6 months, be concerned.
Prepare for at least a 5-year period to get funds back from investments.