There is no longer an excuse for you not to invest in a startup before it becomes a successful public liability company. Due to a 2016 change in crowdfunding regulations by the Securities and Exchange Commission, it is now possible for a non-accredited individual to invest in a private startup company.
There are several ways for you to buy shares in a startup. For example, you can select a company to invest in from a crowdfunding website or buy shares in a venture capital fund that invests in startups. You can also buy shares directly from a company that you know.
Startups are, however, riskier to invest in than public limited companies because they aren’t established businesses and have no performance history. You could lose all of your investment. You must, therefore, ensure you conduct more than the regular amount of due diligence to reduce your risk as much as possible.
One way to greatly reduce the risk of losing your money is to lend capital rather than buying equity. Lending ensures you start getting your investment back in the form of loan repayments with interest. The downside is that you may not earn as much profit as you would earn as a shareholder. If you do decide to invest in a startup, make sure to follow the below tips.
Factors to look out for before you invest in a startup
Startups can either be a very lucrative investment or a huge waste of capital. It is up to you to figure out the best companies to invest in so as to make a profit. The first thing you should investigate before you invest is a company’s management. Choose companies with experienced managers that have successfully run businesses before. You should also get along with them on a personal level. If you have a question about the character or ethics of a management team, it is best to walk away from the investment.
Also, note that you can invest in startup companies at different stages of their life cycle. Investing at the seed stage of a company will likely bring more returns than investing at later stages when the company has proved its profitability and is, therefore, less risky.
Do your own personal check of a startup’s valuation figure. The valuation may be overinflated and you will only know this if you do the calculations yourself. You should also investigate the company’s assumptions and whether they make sense.
Always check that all the company’s documents are in order. For example, the company should have a genuine incorporation certificate and its shares must be properly issued. All leases and contracts should also be properly ratified by a reputable securities attorney.
Start-ups are a great investment opportunity
One of the best investments you can ever make is buying shares in a company before it successfully goes public. Unfortunately, even with thorough due diligence checks, it is impossible to know which company will be the next Apple. The best way to protect yourself from bad investments would be to invest in several startups so that even if some go bankrupt the profitable ones end up covering the loss.