If you’re just starting out in investment, then you’ll probably encounter a lot of people who tell you never to invest in start-ups. However, lots of people do, and indeed many of them are precisely those seasoned investors who like to dish out cautionary advice. If they weren’t doing it, then the only companies that ever got off the ground would be those run by people with a lot of money of their own – instead, we see a lot of internet companies started by people with nothing but good ideas. However, if you’re interested in funding a company like this, then how can you go about it, and what can you expect to gain?
How start-up investment works
There are two main ways that you can invest in a start-up. The first is to buy shares at a fixed price, through a formal fixed equity round or through a crowdfunding system. The second is to purchase convertible securities, which translate into proportionate amounts of equity. Either way, the idea is that your funding will enable the company to develop, and your investment, which may initially be worth very little if immediately sold, will increase significantly in value as it grows. Of course, there is a high failure rate for start-ups, so your anticipated returns if the company is successful should be adequate to compensate you for the risk that you are taking – an approach that should at least even out if you invest in multiple start-ups, and do better if you pick your investments well.
Choosing the right start-up
When you’re looking for a start-up to invest in, you should be asking yourself three things:
- How strong is the central idea, in terms of both its practicality and its financial potential?
- How capable is the team running it?
- How happy does the investment make you?
In order to establish the first of these, you may need to do some market research as well as obtaining a thorough overview of the competition. On the second point, you should expect to see the resume of everyone involved and meet with them so that you can make your own assessment. As far as the third is concerned, many investors prefer to take risks on ideas that make them happy for other reasons, such as because they could help the environment or they will help support the careers of people from a disadvantaged minority group.
Investing in a start-up is not like investing in a more mature company, in that there is a much stronger expectation that you will be both a funder and a mentor, bringing in the benefit of your expertise to help the start-up grow. You could introduce them to Iconic Industry, the tech marketing company run by Valentino Vaschetto, to improve their reach, or work with them to identify areas of weakness and recruit the right personnel to fill the gaps (see Valentino Vaschetto on YouTube).
Under your tutelage, what starts out as a promising team with a good idea could become a very successfully company – and then your modest investment could be worth a great deal.