Entrepreneurial Tips Simplified.
Investing money in a startup has the potential to yield significant returns, butt it's not a risk-free enterprise. There are no guarantees that a fledging company will take off, and if it fails, investors may walk away with nothing.
Investing in startups is the next hot thing that all investors are talking about right now. But before we get too excited about where to put our money, we need to ask ourselves: how do we maximize the money we make from these investments?
This article is going to highlight a few important things you need to consider before slamming your foot on that investment gas pedal. There are 4 factors that you should consider before making an investment!
Wrong! There are actually several factors but today we will discuss 5 key factors to put into consideration. Walk with me:-
#1. Required level of involvement
The level of involvement that goes along with investing in a start-up directly corresponds to the type of investment. For example, someone who invests in a startup through a venture capital firm, for instance, would have limited interaction with the team that runs the start-up. An angel investor, on the other hand, is looking at a very different scenario. With angel investments, the investor is granted an equity stake in the company which means they have the opportunity to participate in decision-making, alongside the startup's leadership. By comparison, an investor who funds a startup's crowdfunding campaign would also receive an equity share but they wouldn't have the same scope of control as an angel investor. Ultimately, it's important to be clear on how much or how little involvement you'd like when handing money over to a startup.
#2. Consider their use of funds
As an investor, it's pretty important to understand the what's, why's and how the startup is intending to spend their money. So dig deep into their spending to date, as well as their future plans. Try to review the companies' salaries and see how much the founder/s intend to pay themself/ves. Additionally, think about the milestones the startup needs to accomplish and try to understand if the required funds raised will allow those goals to be reached.
#3. Competition
Third, you should check out the competition. Currently, are there any products or solutions that address this problem? In what way is the product going differentiated from the others. Is the start-up going to patent or protect the product from being copied? The thing here is to see how the product the startup will produce will be more attractive for customers than any other current or future product.
#4. Expected rate of return
Angel and venture capital investments are often fueled by a desire to help entrepreneurs succeed, but the possibility of making money is also part of the appeal. Analyzing the potential return on investment associated with a particular startup is a must for investors who are focused on maximizing earnings. Again returns depend on the type of investment involves. For an angel investor, it's typical to anticipate an annual return in the 30% to 40% range. Venture capitalists, on the other hand assume a higher degree of risk which translates to a higher expected rate of return. Equity crowdfunding is an equally high risk investment strategy and because it's still relatively new, pinning down an average rate of return is difficult. When estimating returns, take care not to overlook any fees or costs associated with the investment.
#5. Exit strategy
Having a definite exit strategy in place is a requirement for any investment, but it's particularly important with startups. Investors should be clear on when and how they'll be able to withdraw their initial investment, along with any associated gains. For example, an angel investor would need to know at what point they'd be able to sell their equity shares. Again, this is why it's necessary to be aware of the time frame involved to make sure you're able to exit at a point you're comfortable with.
Conclusion...
With all these tips, we hope you're now ready to fuel innovation. As a potential investor in a startup company, it's important to remember you always got to follow your gut. Ask yourself if the business is addressing a real problem in the marketplace and if it makes sense.
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