Investing in a startup that holds great promise can mean fame and massive fortune for the company and its shareholders. However, many are unaware of the depth of responsibility that falls on the early investors of a budding company. Investing in a single company can be a risky gamble for many. If you are ready to invest in a startup, consider what investing in one consists of.
Placing Significant Faith in the Founder
Although a superb idea can mean big bucks for serious investors, it is more important to realize that you are actually investing in the founder of a company. Even the greatest idea can fall apart if placed under the responsibility of an incompetent CEO. Great founder possesses domain expertise, grit, charisma, and a clear purpose. If you do not believe that the founder of the company is trustworthy and capable of operating the company efficiently, then it may be a bad investment to undertake.
Buying Supplies and Storage Space
To get a startup ready for operations, it is important that the company purchases all of the necessary supplies, equipment, and space for executing operations. To launch a business without having adequate supplies and equipment to meet the needs of employees and customers only leads to bottlenecks in business operations. Purchasing warehouse storage space is a good idea to store inventory and equipment that many not be used right away, but are likely to be put to use in the future.
Examine the Numbers Yourself
Many startups come up with their own valuations for what the company may be worth, but those figures can be below or above the actual value. The U.S. News and World Report suggests that you should do your own deep analysis of the numbers that a startup provides to determine if it really is a good investment. In addition, consider that it may take up to a decade for you to receive a return on your investment in a startup. In some cases, you may be in a better position to simply lend the money to the company for a fixed amount of time.
Setting Aside Emergency Funding
Although a reasonable, detailed budget plans to include every expense a startup may encounter, the fact is that it is not always possible. For this reason, every startup investor must consider that the company may need to acquire additional funding to meet unexpected needs or handle problems that may suddenly arise. If you are only willing to invest a certain amount of money and no more, the startup may struggle unnecessarily, or even fail at a difficult transitional point. Setting aside emergency funding in times of crisis is a wise decision for any investor who truly wants to see a startup succeed.
Offering Valuable Advice and Guidance
Many startup companies often have founders who are knowledgeable, but lack experience. It is wise to invest in startups in which you have significant knowledge of the industry already so that you can assist the company in making better decisions. It is vital to offer your best advice and suggestions for the company during every phase. Doing so can save the company hardship, struggle, and potential losses that can be avoided by making strategic decisions in the beginning stages. Your input, and the input of other stakeholders is important to chart the best direction for a growing startup.
Diversifying Your Investments for Profits
One of the easiest ways to increase the odds of maximizing the return on your investment is to invest in more than one startup, or in multiple business ideas of a talented founder. Placing all of your eggs in one basket can lead to an incredible gain or a devastating loss. Diversifying the amount of startups you invest in can lead to multiple, profitable gains across the board.
In some cases, a startup founder that you are investing in may have another innovative idea that can also prove to be a lucrative endeavor. If you truly believe in a founder, consider funding more than one of his or her business ideas, because nobody can predict with 100% accuracy which one may strike gold.
If you are thinking of investing in any startup, be sure to fully review their business plan and meet with all of the major people that will be making decisions within the company. Be sure to do your research before taking the leap, and discuss all contract terms with your financial advisor and attorney. After reviewing the feasibility of the business plan and checking the economic market and industry terrain, then you may be ready to invest in a startup. Set a limit of what you are able to contribute to the company on paper before moving forward to protect your assets as well.
