Investing in a startup can be a rewarding experience on both the personal and financial fronts. While you will be directly helping a company gain ground in the market, thereby contributing to capital formation and job creation, the success of the startup will translate into a profitable return on investment (ROI) that you can enjoy down the lane.
However, it is essential that you consider a few pointers before choosing a particular startup to invest your money in. Here are some of these pointers which you need to know about beforehand.
The Market Opportunity of the Startup
It is imperative that you take into consideration the size of the target market the startup is aiming to capture. By size, we not only mean the actual size of the market at launch, but also the size of the market in the future. If the market is new and just growing, find out how promising it is and how big it could grow in the coming years? If the market is already an established one, find out what the startup team has in mind when it comes to projecting themselves as unique solution providers that stand out from existing solutions. This will help you ascertain if a startup is worth investing in.
The Familiarity of the Domain
If you are investing in a startup for the first time, it pays to invest in a domain you are familiar with. This gives you a better understanding of several factors related to the startup, including its mode of operation, the target market and the potential success of the startup. It also reduces your risks of losing money in a market or domain you hardly know anything about. Also check if the startup has a scalable business plan that projects its growth in the coming years, right down to the time when you can get your money back.
The Pre-Engagement of Products
It is wise to invest in a startup that has already started engaging its products/services with customers in addition to getting feedback from them. This way you know the startup has already gained a target market, and has a team that is intent on promoting it rather than letting it sit on the drawing board infinitely.
The Diversification of Investments
As an investor, you have all rights to invest in any startup you want. A wise decision then, will be to invest small amounts in several startups instead of dumping all of your money in one startup. In addition to reducing your risks of losing money, this will help you get an appropriate ROI in the form of public offerings or acquisitions.
The Use of Funds
It is imperative that the startup you choose to invest in has a clear plan on where they intend to invest the money and how much they intend to invest. This way, you know you are investing in a team that is intent on launching its startup rather than buckling under pressure midway. Also ensure to check if the startup has enough funds to accomplish necessary milestones for its growth and profitability.
The Legal Documents
Before investing in a startup, it is essential that you take a good look at the legal documents. These include term sheets, investor agreements, subscription agreements and other articles of incorporation. The legal documents will also give you a fair idea of how the company will be structured and everyone who is involved in its growth, including advisors, directors, and other investors). A good look at the legal document is also necessary to ascertain how much percentage you will stand to get from the gains for the money you invested.
Investing in a startup can be a personally and financially rewarding experience. Before investingin a startup, you will need to take several pointers into consideration. These pointers will help you spot the best and most genuine startup to invest in down the lane.