Have you ever wondered about investing in new markets and startups, but don’t know where to begin? There are many questions to think about – which market do I invest in? Which start-up should I choose? How much should I invest? Don’t worry, you aren’t alone – I’ve devised this handy list of tips to help you feel more confident in taking those big chances and changing your life and your career for the better.
When it comes to deciding which startup to invest in, it is important to look for entrepreneurs with innovative platforms solving real problems, with cross-border commercial potential. Finding a region with a thriving entrepreneurial ecosystem, home to brilliant and skilled founders, with highly promising ideas. Places rich with seasoned entrepreneurs include the Middle East and North African regions, Nigeria and South Africa.
Consider your objectives.
Remember, there is a substantial investment of time, energy and knowledge before any money is involved, so before diving into the investment evaluation, you need to clearly define the organizational goals and expected outcomes of what you want from investing.
Think about Investment losses – and don’t take them too hard
You must remember that there are successes and failures when it comes to investing in a startup. These companies are in their infancy, and only trial and error can help to determine how the business will turn out in its first year. Having the mindset that the business could turn either way is important when making a decision. Therefore, an important piece of advice – only invest money that you can miss. You should be willing to mentally write off your investment when you start.
Learn to use startup financial instruments
Those who consider investing in start ups are usually well informed on how bonds and shares work. But when it comes to startups, the financial instruments used can be quite different – for example – convertible equity or convertible loans.
A convertible loan: A convertible loan is a loan which accumulates interest over time, which will either be repaid or, in most cases, convert into equity at a future date.The conversion happens at a “qualifying event” – usually the first major equity investment round. At this conversion, the convertible investors get the shares at the price used in this investment round. Of course, they invested their money much earlier, and so they get a pre-agreed % discount on that price. Often there is also a cap on the maximum share price that can be used. These loans represent a form of financing which ordinarily takes less time than an equity funding round (which can be both costly and time-consuming).
If it all seems confusing, it would be wise to conduct some research before you jump the gun. Being well versed in financial knowledge before you start will allow you to hit the ground running, helping you make the right choice.
Exercise your Due diligence
You’ve met the team, you’ve heard their pitch. Now, what makes you finalise your decision? You may feel enthusiastic about investing straight away, but it is always important to evaluate the fineprint. Here are some questions you should definitely ask yourself before deciding:
- Are there loads of small or inactive shareholders?
- Does the company have debts which they may not be able to pay?
- Is there a co-founder/shareholder who is no longer active and needs to be bought out?
- Is there a shareholders’ agreement containing a strong anti-dilution, or liquidation preference?
- Are all the relevant IP and URLs owned by the company? And, if they have IP licenses, do these licenses have a sufficient length and scope?
Some of these terms may confuse you, and getting a lawyer to help you out can be
Costly. So, what’s the most cost efficient way of getting help?
Expanding your Network
A way to prevent high costs is to go and find other investors who have dealt with the problems which concern you. You can even get into the habit of investing alongside them. Expanding your network is essential – every company is different and every startup has its own details that you need to understand and get your head around how they operate. Startup investing is a skill that you can learn. For any topic, it is likely that you can find an expert that knows more about the matter than you do. You can even get into the habit of investing alongside them.
Diversify your portfolio
Don’t throw all your money at one startup. For any company, there is a risk that the company will fail altogether. So, start small. For example, when starting with your portfolio, choose to invest £1,000 into 5 different companies. This way, you haven’t put all of your eggs into one basket. Once your confidence and portfolio grows, you can start to invest larger amounts into your favourite companies.
Investing takes patience
Even if a business is being successful, it can take a couple of years to get your investment back. The most common way to get your money out of a private company is a liquidity event. This includes a public offering or an acquisition by another company, but those events take time. But remember – be patient! It all pays off in the long run.
Although investing may seem like a daunting task, it can be seriously rewarding in the long run. All you need to do is feel confident about your knowledge in the mechanics and risks involved in startup investing. Even if you owned a startup, investing in a startup, knowing all about stocks, bonds, and investing in startups is a very different thing. So making sure you’re prepared is key to being successful as an entrepreneur.
– Jawaad Jatala, CEO