How to Seek Growing Startups to Invest In: 5 Pro Tips

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One good and effective way to grow your money is through investments. Some people go for stable and secure investment options, like mutual funds, bonds, or stocks. However, others are searching for growing startups to invest in.

This brings a major challenge of getting the right startup, considering that close to 90% of startups don’t go past their second trimester? If you are one of these investors, don’t worry—we got you covered. Here are 5 tips to help you in search for the right startup to invest in.

Invest in the founders

Investing in growing startups is an exciting, and yet daunting idea at the same time. This can even be more challenging if you are a first-time investor. In this case, you will need to ask yourself a few questions, like:

  • Where do I start?
  • How will I ensure that my investment doesn’t fail, and will give me money in the long run?

For most people, this might look like a gamble, but it is for those who don’t know where to invest their money. When investing in a growing startup, you must keep this fact in your mind—90% of all growing startups fail. That means, your investment might be heading the same direction.

Yes, you might be excited by the new and innovative business idea. But, who is running the business? The thing is, you need to first vet the business, as well as the founders. Then, don’t invest in the business—invest in the founders. If the startup has strong leadership, there’s a better chance that it will succeed, and give you a good ROI.

Don’t follow other investors

One mistake that most people make is to invest in a startup, simply because other people are doing it. Well, we can compare this to jumping off the bridge because everyone else is doing it. Well, do you know why they are doing it in the first place?

This also applies when you want to invest in a growing startup. You might be tempted to follow other investors, especially if you think that they are saving you from making a poor decision. What you need to note is—you will end up losing your money with the rest of the investors in case the startup fails.

You need to do your homework and know why you think the business is bound to succeed. To get the necessary information about the business, you must consult other investors, as well as business leaders.

Understand your limits

You might have heard this phrase countless times—“investing in growing startups is a risky endeavor.” There’s a possibility that you will win or lose—massively. Depending on the number of investments you make, you are more likely to succeed or lose in all. Therefore, you must ensure that you are willing to lose the amount of money you want to invest in these startups.

This also calls for diversification, as it increases your chances of succeeding. Investing in one startup is like putting your eggs in one basket. However, if you diversify your startup investment, and make small investments in many startups, you will be increasing your chances of getting a good ROI on your money. If possible, also diversify the kind of startups that you are willing to invest in. However, if you have expertise in one area, then focus on those businesses.

Do your due diligence

As we said earlier, investing in a startup is very exciting, especially if the business idea looks so promising. However, experts from the GainWest investment platform, say that you must put away your excitement, and scrutinize the business idea. Here are some of the things that you need to check:

  • How has the business formalized the cap table? Or does it have a lot of inactive or small shareholders?
  • Does the business have outstanding debts that it cannot repay?
  • Is there a shareholder or co-founder who’s no longer active, and must be expelled from the business?
  • Does the business have a shareholder’s agreement with a strong liquidation or anti-dilution preference?

Here you need to consult professionals to get insights about the business. Also, ask the management to provide you with Information Memorandum to get these details. However, if the startup doesn’t have a memorandum, you will need to dig deeper and collect the information personally.

Create a good and reliable information flow

When investing in a listed company, it’s very easy to check the company’s daily share price as well as other related news online. However, this is not possible with a growing startup. Typically, startups work around the clock to ensure that the business succeeds—and this shows why it’s hard to get regular updates from the business.

Also, note that even if the startups sent monthly updates, the information and quality of updates will differ. Besides, most startups don’t have the financial or communication experts to send polished strategic and financial reports. So, you might have to seek this information for yourself—and sending official emails will get the job done—so long you are also offering good business ideas. All in all, you should ask the startup to give you an example of their communications and update structure, and then create a good and reliable information flow that you are comfortable with. 

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