In the past, there were many barriers to startup investing. Nowadays, these have been reduced and angel investing is available for everyone. Have you ever considered investing in early stage startups? But you don’t know how to do it? There are many investors who want to become a business angel, but don’t know where to start. Here are some tips and tricks to get you going:
Mentally write your investments off
The chance that a startup will fail is higher than that it will succeed. For investors, this means that for any startup company they have, there is a higher chance of losing their investment than making money. Good returns on a startup portfolio come from getting a few big hits in your portfolio, which could take a while to realize and are relatively rare. Therefore, please only invest money that you can miss. You should be willing to mentally write off your investment when you start.
Learn to use the financial instruments that are designed for startup investing
People who are considering a startup investment are usually familiar with how normal shares and bonds work. However, in the world of startup investing there is a range of unique financial instruments, which you will need to learn how to use. In particular, convertibles are becoming the norm. Convertible equity or convertible loans have several advantages over regular shares or loans.
The details of due diligence
So, you have come in contact with a startup, met the team and they’ve done their 2-minute elevator speech. Suppose you are enthusiastic about the business idea and you want to invest in this startup. Now is the time to take it slow and look at some details:
- How is the cap table formalized, or are there loads of small or inactive shareholders?
- Does the company have debts with they may not be able to repay?
- Is there a co-founder/shareholder who is no longer active and needs to be bought-out?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? If they have IP licenses: do these have a sufficient length and scope?
If these terms seem foreign to you, surround yourself with investment friends whom you can ask for help. Expanding your network is pivotal! Some startups have an Information Memorandum to understand all the details. If not, inform yourself.
Set up a good information flow
If you are used to investing in shares of listed companies, then you are used to be able to check the daily share price of a stock and all the latest news online. With startup investing, this is not possible. A more hands-on mindset is needed. As startups communicate a little differently, it is very important for you as an investor to stay updated. Before you decide to invest, you can ask the startup to send over an example update and make arrangements about updates that you are comfortable with. If you have concrete questions: ask them!
Be ready for a long term relationship
Only invest in startups if you think it is exciting and fun. If you want to make money fast, you would probably need to reconsider. Startup investing is a long-term thing. Only when the startup is profitable, they can reward their early investors though an exit. Aside from this, it is important to know your investments won’t just depend on picking the good companies. It is also about what you add to the company after investing. A startup is all about having a mindset which is set on discovering and exploiting opportunities. You, as an investor in a startup, can do the same.
Diversify your portfolio
The headline news is simple: spread your portfolio. Don’t throw all your money at one startup. By having a broader portfolio, your portfolio won’t be “all or nothing” like it is with just a single investment. Nevertheless, start small so that you can keep track of all of them. That way you can get more experienced, and see if you enjoy it, without exposing an enormous amount of capital. Once your confidence grows you can offer larger follow-up investments to your favorite companies.
Ask for advice and follow angel trainings
Startup investing is a skill that you can learn. Always be on the lookout to learn more, and try to educate yourself. For any topic it is likely that you can find an expert that knows more about that particular matter than you do. There are also places which offer angel investment trainings. These can be found online with an angel investment platform, but also at startup accelerators, for example. Learn from other people!
It is important that an investor knows the mechanisms and risks involved in startup investing, and that the rewards don’t always have to come in the form of a financial return. You can actually learn a lot from a startup, have a direct impact, and you can watch your investment grow. Whether startup investing is for you or not, the only way to find out is by doing it. Sign up for Leapfunder!
About the author
Rutger Kemper studied Business Administration at the RSM Erasmus University of Rotterdam with a Master specialization in Finance & Investments and in Accounting & Control. Additionally, he took a minor in entrepreneurship and took MBA courses in Mexico. He worked for Credit Suisse at the M&A department, for an investment fund in South Africa, and worked with a variety of investors with such as family offices, venture capitalists and pension funds during his time at Van Lanschot and Mercer. During his studies and his working career he founded several companies. One of which is Leapfunder, the leading Online Angel Investment Platform. Rutger is currently responsible for the market in the Netherlands.