Investing in a Startup? Read This Article First!

Around 305 million startups are conceived every year, but statistics show only 10% will succeed. That means if you’re investing in a startup, you need to be diligent about researching the founders and looking for both red and green flags.

Although startups are risky investments, they can make you wealthy if you choose the right one. For example, several billionaires, including Mark Zuckerberg (Facebook), Bill Gates (Microsoft), Larry Ellison (Oracle), Reid Hoffman (LinkedIn), and Peter Thiel (PayPal) made their first millions by investing in startups.

Are you wondering if you should invest in the next big company that just needs a little bit of cash to get rolling?

Before investing in a startup, consider the following points to increase your chances of choosing the right company.

Work with an investment strategist

When you connect with an investment strategist, you’ll have access to private investment opportunities that aren’t on the market. If you don’t like what you see being publicly advertised, you might find something better privately.

When you invest privately, there’s often a chance for a higher return, and if you choose the right strategist, they’ll vet opportunities first and only support those that make the cut.

Determine what kind of investor you are

It’s important to know there are three main ways you can contribute funds to a startup.

• Angel investing: Angel investors are high net worth individuals who often invest in businesses to support a friend or family member, but they also invest in companies they don’t have personal ties with. As an interesting side note, startups get most of their money from angel investors.
• Venture capital: Venture capitalists invest directly in private companies for an equity stake in the company. For example, if you invest $300,000 in funding, you might receive a 10% equity stake in return. If the company is sold in the future for $10 million, you would earn $1 million.
• Crowdfunding: You’ve seen the crowdfunding websites. This is where small amounts of funding are raised by offering perks to the public. Most crowdfunding comes from friends, family, customers, and people who believe in the product or service being created. This type of investment won’t make you rich, but you can get some good perks.

To further help you decide which type of investor you wish to be, consider the returns. Venture capitalists will earn the highest returns since there’s more risk involved. However, angel investors generally see a return of 30% to 40% each year. Crowdfunding doesn’t usually offer much of a return, and is more like a donation in exchange for small perks, like free products, shout-outs, and extra goodies.

Scrutinize the founder(s)

Before investing any significant amount of money, meet the founder(s) of the startup and talk to them about their ideas to make sure you really want to invest in their project. Remember that almost everyone can be passionate about their ideas, but passion doesn’t guarantee success.

Look at the founder’s background and experience in the industry. Many startups are innovations, but it’s important they have at least some general level of experience when it comes to executing ideas.

For example, if the startup involves building software, it’s a good sign if the founder is a developer. However, it’s not a requirement, since they can always hire an expert programmer. However, someone with no experience in the software industry may not know how to guide the development process.

Research the market

The best ideas will fall flat if there’s no market. For example, many software developers have created amazing applications that never went anywhere because people weren’t interested. They had great features and seemed useful, but in many cases, people weren’t motivated enough to adopt yet another application. This can happen even to well-known brands. For example, Microsoft has a history of failed projects under their belt.

A startup’s success relies on capturing a specific segment of the general market, and that means customers need to want what they have to offer. To know this, the startup needs to know exactly who their customers are.

Do your own research and see if the market is saturated or not, and if there are already a handful of similar products or services, research them to see where they might fall short. If the startup you’re interested in looks like it will be filling in some critical gaps, that’s a good sign.

Investing in a startup is a process

When you invest in a startup, it’s going to be more involved than just contributing some money. You have to do your own research and use the data you collect to make your final decision.