5 Things You Need to Know Before Investing in Start-ups

Investing in a start-up business can be a great way to make a decent passive income. It can also be personally rewarding knowing that your investment is helping new entrepreneurs realize their dreams and bring new ideas to life. In addition to all that, many start-ups contribute significantly to the national economy through the creation of jobs and revenue.

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However, like many other potentially lucrative investment opportunities, start-up investments have to be approached with caution. You can easily recoup hundreds or even thousands of times your initial investment in just a few years, but you can also lose all your money in an instant. The trick is making the right investment choice.

Making the right investment comes down to learning the ropes of the industry and making informed judgments and decisions. This is how venture capitalist Mark Stevens has been able to make and oversee massively successful investments in various fields and lead global investment ventures. If you are looking to dip your toes in the start-up business funding and investing landscape, here are five crucial things that you need to know.

Do Your Research

Learn as much information as possible about the kind of company you want to invest in. Find out about the industry, market dynamics, sales figures, credible projections, political climate, and prevailing trends. Many start-ups, especially in the early stages, are not very well structured or established. So getting reliable information about sales and future projections might be difficult. But, what’s important is to look at the bigger picture and not the particular details. Ask yourself if there is a profitable niche in the industry following the company’s general approach. Is there a future in the business?

You might also want to learn all the technical and legal details of investing in start-ups. Keep in mind that some start-ups, especially in the tech world, can bring in new untested and unproven ideas that may attract unusual business requirements, legally speaking.

Invest in What You Know and Understand

One of the best ways to ensure that you make a low-risk investment is to select a start-up operating in a familiar industry or business environment. For instance, if you are a tech-savvy, it would make sense to put your money in a tech-based start-up. The idea is that you at least have a working knowledge of the business dynamics and the markets.

Besides the reassurance of investing in something you understand and are maybe passionate about, you can also add more value to the company. You can, for instance, buy advisory shares to apply your knowledge in the industry to help steer the infant business in the right direction.

Diversify Your Investment Portfolio

Every wise investor knows not to put all his/her eggs in one basket. If you are genuinely committed to investing in start-ups, it’s important to diversify – invest in different companies and different industries. Some start-ups can take years to start turning a profit or breakeven. Having invested in different areas, you can wait out the slow grinders to start making money while you rip from others. A diverse investment plan also increases the chances of success, given the high failure rate of most start-ups.

Invest in The Company Not the Business

When it comes to start-up investments, many investors often focus on highly volatile and unpredictable aspects of the company. Don’t look at the specific products that the business is offering or how well they are selling, dig deeper and examine the company’s core – who are the founder and what is the company’s mission and vision?

Many start-ups model their businesses on flings fueled by popular culture or short-lived demands. Look beyond the hype associated with new revolutionary products or services; don’t invest in the business, invest in the company and the people behind it. That said, there is no problem investing in a temporally idea or company as long as you are well aware of its nature and are prepared to handle drastic changes in the future.

Identify and Avoid Investor Traps

Be cautious when making huge investments on start-ups; watch out for frauds and investment traps. Nowadays, thanks to the popularity of online crowdfunding, start-up businesses are popping up everywhere. It can be easy to be tempted by exaggerated figures, unwarranted hype, or dubious individuals into making a costly investment mistake.

To get around this problem, make sure you understand what kind of company you’re funding. If possible, talk to the founders and find out every detail about why they are looking for investors, how they hope to use the funds, and how you can recoup your investment. If everything seems legit and you are satisfied with what you’ve gathered, you can go ahead, knowing that you did your due diligence in thoroughly scrutinizing the company. Back out of the deal if you find any red flags or the slightest inconsistencies.

Don’t shy away from investments; if others have made it, you can too. It only takes a bit of effort and time in research, taking note of fine details, and reading between the lines before staking your money.