7 Tips to Successfully Invest in Startups
To invest in startups is risky by nature, especially when compared to other investments, such as equities. Following early-stage investing rules, despite carefully thought out hypotheses and frameworks, is still difficult. “Golden rules of investing” often do not consider experience, the preference or value add of an investor, chance or the unpredictability of markets. They don’t allow you to factor in a business’ ability to pivot or the infinite number of incidental factors that could mean that excellent startup investment opportunities could be missed if an investor sticks stringently to fixed rules.
While evaluating startup investment opportunities, investors must check the viability of the idea. Is the technology or solution going to work once it’s deployed? Is the business scalable? Can the idea be executed and turned into a successful business achieving market-fit? To get interested parties to invest in startups, the disruptive idea should answer these questions.
Product and Business Model
To invest in startups where you don’t understand every key aspect of the business model or the product itself is tricky. Being able to assess potential risks of failure is nearly as important as the ability to derive your own fair valuation and the price you are paying to invest.
The right founders are on a campaign to change the world and to improve people’s lives. Besides the founders, investors searching for startup investment opportunities want to see a team of focused and passionate people who complement the skills of the founder.
Competition should not be taken as a total negative when considering startup investment opportunities. Competition is one of the most important factors that demonstrates the market condition and the viability of the business idea.
The more capital efficient a business is, the less capital it will require to scale. Capital efficient businesses guarantee a higher return on investment for investors. Part of the attractiveness of internet or software-based businesses to investors who want to invest in startups is their low customer acquisition costs and their ability to scale quickly.
A startup’s valuation is always subjective. It is essential that the valuation is equitable for all parties concerned, to ensure a healthy future relationship amongst stakeholders. A sign that a fair valuation has been reached is when both the startup and the VCs looking to invest in startups agree on a value that feels slightly uncomfortable.
There is a famous saying that one should not put all their eggs in one basket. This is especially true for investors due to the substantial amount of money concerned. Start by making small bets on ideas and faces and adopting a portfolio approach where there will be some hits and some flops. The idea is to ensure the hits are large enough to more than makeup for the failures, thereby avoiding big losses. To manage the high risk in each individual company and the potential of a high return, investing in a portfolio of companies balances the odds of success. Of course, there needs to be quality of deal flow – startup investing is only as good as the best deals you see.
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