Investing in start-up companies is becoming increasingly popular among day-to-day consumers. Anyone with spare change can be dazzled by these new ventures and their vision and products, leading them to invest in start-ups.
While this comes with some significant risks, it can also bring significant financial returns if you know how to spot a successful venture. Here’s some guidance on how to find successful start-ups and minimise investment risks.
What Are Start-Ups, and Why Invest in Them?
Start-ups are young companies that seek investors to develop a business model with innovative and disruptive ideas at their core.
The final goal for start-up founders is to take the company public or make it grow, before selling it for a high profit. Many successful companies, such as Shopify and SumUp, started this way.
Before embarking on the investor-seeking phase, start-ups need to satisfy the MVP (Minimum Viable Product) criteria. That is, the prototype, or initial idea, needs to be good enough for further development and investing.
Investing in start-up companies can be daunting. According to Forbes, about 90% of start-ups fail within the first years of operation, leaving the investors with nothing.
However, it may well be worth it, following the logic of high-risk, high-reward endeavours. Assuming you’re patient and lucky enough, you could have a big financial return if things go well.
Crowdfunding Investing Platforms: The Safe Way To Go
After clearing the MVP, start-ups turn to investing platforms. These will assess the start-up’s business plan and project viability, before adding the shares to their offer.
Most importantly for you, they offer prospective investors financial guarantees in case things don’t go as planned.
Through crowdfunding platforms, such as Seedinvest or WeFunder, you can support a rising business with minimised risks, starting with as little as €100. The Balance has compiled a list of crowdfunding platforms tailored to the public.
Learn From Angel Investors
Angel investors can teach you a lot about investing in start-ups. These successful retired businesspeople look for alternative ways to stay in the financial game. They also mentor budding entrepreneurs, and provide their invaluable know-how and business contacts.
Angel investors decide to put their own money into small businesses with little to no guarantees. What drives them to bet on these ventures is often nothing short of a gut feeling, telling them things like: “that business is going to grow”; “there is a gap in the market to be filled”; “these guys have skills and motivation”.
Check out this article featured on LinkedIn to learn more about the lessons you can learn from angel investors.
How To Mitigate the Risks
Ordinary people cannot afford to put millions on the plate and risk it all for a start-up company. Even when using reliable investing platforms, it’s worth spending some time doing research to minimise your investment risk.
To start off, only invest if you’re financially secure enough to lose the money you’ve invested. Start-up investment is not for the faint-hearted, and although some platforms may offer guarantees, maximum caution is advised.
Secondly, use only crowdfunding portals approved by regulatory agencies, such as FINRA (American National Security Associations) that you can find on this list. If you’re investing in the European Union, check out the Startup Europe project sponsored by the European Commission.
Lastly, try to answer the questions we have listed out below to learn how to spot successful start-ups. By doing so, you are better advising yourself on where to invest your money.
What To Look Out for Before Investing in Start-ups:
How Big Is the Market Opportunity?
Try to figure out if other companies already provide the services offered by the start-up you’re considering investing in. You may be surprised, but someone else might be already doing it very successfully – even if it’s a niche sector – and they could be hard to compete against.
Likewise, even if the start-up’s activities sound familiar to you, there’s a chance no one offers the same products or services in a certain local area – highlighting an unsatisfied demand gap.
To fully understand a start-up’s potential, we recommend looking into financial indicators. The Service Available Market (SAM) and the Target Market (TM) are two top financial indicators to use when assessing a start-up’s potential market share.
Do You Know the Management?
Behind every business, there’s always a person (or a group of people) that the company’s success depends on. It is advisable to thoroughly vet the people behind the start-up you’re considering investing in to determine their reliability.
Do you know the management (founders and co-founders) personally? Have they been referred to you by friends or trusted colleagues? What is their business track record, and what are their qualifications? Do they have a criminal record?
These are all questions you should ask yourself before putting your money on the table. It may take a while, and you might need help. If you believe it is also worthwhile to your investment, involving lawyers or even private investigators, is not unheard of.
Why Is the Product Great?
It’s important to understand why the product or service the start-up sells is unique and whether it could stand out in the market. It is also vital to keep a healthy dose of scepticism and not be enchanted by the initial pitch.
Start-ups’ products may sometimes not be easy to grasp, they could even sound utopian. But behind some of these ideas are promising businesses that succeed and go on to disrupt the market.
Think of Instagram, for example. In 2012, this picture-sharing app became so iconic and popular that it was bought by Facebook. Investors who initially believed in the project multiplied their shares by a factor of 300.
Bottom line? Don’t be put off by visionary ideas, but be careful and, again, do your research.
Are There Any Intellectual Property Infringements?
Keep in mind that what may look like an original idea could already be patented elsewhere in the world. That’s why it’s important to inspect the international patent registers carefully. You don’t want the start-up you’re investing in to get tangled in expensive lawsuits!
Likewise, it’s important to make sure that the start-up has already registered its patents. If not, someone may steal their ideas, and everything will go bankrupt in a split second.
If the patent has been developed with funding from public institutions or in cooperation with universities, you should assess the company’s rights to use the technology.
Do the Financial Projections and Business Plan Look Viable?
Have a good look at the start-up’s business plans and financials. It’s crucial that the growth projections are reliable and realistic. The company itself, or alternatively the crowdfunding platform, is obliged to provide these essential documents. This way, you can make informed decisions based on transparent data.
If you cannot understand them, ask for help from an investment consultant you trust, but never go through the process without taking a long look at this data.
If something seems off or hints that it is an unwise investment, take a deep breath and consider another investment. It’s not worth risking a significant amount of your money on something you’re not entirely convinced of.
Investing in start-up companies comes with risks. Nonetheless, it can bring considerable financial benefits over time. With the rise of crowdfunding platforms, anyone can safely invest in these new ventures – even starting with moderate sums.
Still, it’s important to be financially stable before embarking on start-up investments: losing all the invested money is a real possibility that needs to be considered. Learn from the successful angel investors and ask a few essential questions, before putting your money on the table.
You’ll need to consider the market opportunity, the management behind the company, the unicity of the product/service, and the financial projections’ viability. Last but not least, always trust your instincts first.