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Things To Consider Before Investing in a Startup

Everybody likes a good startup investor story. You know the kind, how so-and-so took a chance and invested in a startup a

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Things To Consider Before Investing in a Startup

Everybody likes a good startup investor story. You know the kind, how so-and-so took a chance and invested in a startup and is now top of the proverbial heap. And maybe you’re considering getting in on the action.

If only you had a stockpile of cash, you may be thinking. But the fact is that investing in a startup is more than figuring out how much money you’ll need or even how much you might get back. There are various other elements that go into it.

Keep reading for some things you should consider before investing in a startup.

What Kind of Investor Are You?

This is what you must first ask yourself. Perhaps you wish to be a venture capitalist. Such investors invest directly in companies in exchange for an equity stake. Say you provide a startup with $250,000 in funding for a 10% stake. If the enterprise is sold in the future for $10 million, you stand to get $1 million.

Or maybe you see yourself as an “angel” investor, someone who uses their capital to support a relative or close friend, as is typically the case. In this case, your returns will vary, depending on the arrangement.

If you go the crowdfunding route, you and other individuals will contribute relatively small amounts to help a startup get off the ground. Buy-in in costs are less here than they are in venture capital or angel investing.

What Kind of Role Do You Want?

Perhaps you envision yourself going beyond funding and having some other involvement in the nascent business, especially if you personally know the founder. If so, you need to mull what kind of responsibilities might work for you.

How involved you are could also hinge on the type of investor you plan to be. If you want to be a venture capitalist, for example, you may want to contribute an expertise, such as in sales or marketing. Your role as an angel investor could depend on your relationship with the founder and what you both decide.

Are You Willing to Do Your Research?

Whether you’re a fledgling investor or a qualified purchaser, you must set aside emotion and take a clear-eyed look at the founder and the business plan. Check out the founder’s background and experience and make sure the ability and acumen are there to execute the idea.

What’s the Rate of Return?

This is one of the questions that you should feel comfortable asking the founder before you invest. You should also feel free to ask how much debt they’re carrying and how much in total capital they need.

In general terms, what your rate of return will look like will depend on the investment type and amount.

What Does the Potential Market Look Like?

Before you invest, you must consider the market potential of your possible investment. What else is out there like the proposed product or service? Is the market already saturated? Is a pervasive need being filled? The founder should have answers to all these questions.

What’s the Company’s Next Move?

You want to know if the founder’s idea is flash-in-the-pan idea or whether the vision is long term. So, ask. After all, you want to put money into a startup that has a far-reaching plan.

As you can see, there’s a lot to consider before investing in a startup. And you should. You also might want to consider an alternative platform such as Yieldstreet, which offers investment opportunities not directly tied to the stock market and that were previously only available to the top-tier earners.

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