Investing money in a startup has the potential to yield significant returns, but it’s not a risk-free enterprise. There are no guarantees that a fledgling company will take off, and if it fails, you will end up with nothing but disappointment.
Here are 5 must-know before planning to invest in a startup,
1. Invest in a domain you know
One of the best ways to reduce risk is to understand the market that startup operates in. This will provide you with a better sense when projecting the potential success of the venture. Make sure that the business has a scalable model so that it can grow to a level in which you will be able to get your money back as an investor.
2. Know your team
When you are investing in a startup, you are really investing in the team. When the direction needs to be changed because something is not working, having a good team is the difference between success and failure. You want to make sure that the co-founders have experience in what they are trying to accomplish. Have they been successful with another company, or, if this is their first business venture, how well do they work together?
Find out what their history is with each other. Knowing who is running the business is as important as what they are trying to run. A bad team can ruin a great business.
3. Create and maintain an emergency fund
Most smart investors put enough money in a savings product to cover an emergency, like sudden unemployment. Some make sure they have up to six months of their income in savings so that they know it will absolutely be there for them when they need it.
4. Diversify your investments
Instead of putting all your eggs in the same basket make multiple investments. This will increase your possibilities of success and will also help to reduce the risk involved. It will also increase your chances of getting your money back with some returns at a liquidity event such as a public offering or an acquisition by another company. In the end, these investments are for the long run so try to be patient.
5. Draw a personal financial roadmap
Before you make any investing decision, sit down and take an honest look at your entire financial situation — especially if you’ve never made a financial plan before.
The first step to successful investing is figuring out your goals and risk tolerance – either on your own or with the help of a financial professional. There is no guarantee that you’ll make money from your investments. But if you get the facts about saving and investing and follow through with an intelligent plan, you should be able to gain financial security over the years and enjoy the benefits of managing your money.