India is today, one of the leading countries in hosting the maximum number of startups. We have established startups in a variety of fields like fintech, cosmetics, medicine, online gaming, logistics, food delivery, and a lot more. we are rapidly moving towards topping the list. It is safe to say that bringing in new startups has not only brought new products to the market but also has increased the overall GDP and investor economy. This would definitely serve as a pathway for the investors to contribute to the greater good.
There are many startups in a variety of industries that are making a name for themselves but not all of them survive. Of course, the reward is fascinating but the risk of losing the entire money is also there. The feedback on investing money in Startup Companies is immeasurable. So, there are many things for investors to keep in mind while investing in Startups.
According to a report, 90 % of Indian startups fail within the first five years. Hence as an investor, you must perform quality research before investing in startups.
But investors need not just fall for the creativity. Any investor’s finances are as essential as a startup owner’s initial funding and it is needless to say that with increasing technological skills frauds and swindling instances have shot up like a rocket.
In this blog, we will talk about some tips that an investor must know before investing in a startup. So let’s get started.
Below is the Tips for Investor Before investing in startups
1. Choose the domain you know
The investor should understand the domain in which the startup operates in order to minimize the risks after investing in a Startup Company. By doing this, potential success can be achieved in the investment process. In any startup company, it is important that it grows and money comes back to the investor.
2. Dip deep about the founder
Particularly for early-stage companies, it is the people behind the company that matters the most. The main reason is that products must be tested several times before they can be found to have a place in the market. It all boils down to having the right people in the right seats, much like the book “From Good To Great” by Jim Collins. The right direction will eventually become apparent. In this section, you should be emphasizing their background (previous employers, educational history, etc.) as well as the value they bring to the company.
3. Know the legalities
Investing in a startup company is a risky venture, and sometimes fraud occurs. It is important for investors to review the legal documents. This may include details about the company’s structure, or who is involved. Depending upon how much money they are investing, investors should know what percentage of ownership in a startup company they will receive.
4. Determine the monetary plan
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. Understand their fund usage
When investing in a startup company, it is important to understand what, why, and how the company plans to spend its funds. You would be better prepared when testing the entrepreneur’s vision if you knew what to do in this section. Furthermore, you should review the founder’s salaries and find out what they intend to make. Additionally, determine if the funds that the startup is raising will be enough to enable the company to hit important milestones that could enable the company to become profitable or raise more capital.
6. Scrutinize the overall product market
To beat the competition, it is critical to know what kind of competitive advantage the startup has developed. It may be better to investigate the appetite in the market for the startup than clone it. The startup should also be active in a big market. Focusing on customer development is a must for the founding team. They must also listen to what clients have to say. Startups need feedback when they need to pivot or iterate their products until they achieve their goals. Although the specific idea is important, the approach of the team, as well as the market size, are equally important.
7. Check the commitment of the founder
The startup founders, usually, are highly committed to their projects. But still, if you are investing, it is highly essential that you keep a check. You have to see what efforts he puts in or maybe just the resources he uses. With this, you will get an idea of how much the startup means to the founder.
It is best to follow your instincts when investing in a startup company. Assess whether this business addresses a real need or problem in the marketplace, as well as whether it makes sense from a business standpoint. I would strongly advise you to move on without hesitation if you don’t see any real use for it. Moreover, never risk investing money that you are not prepared to lose.
Related Article: Red Flags for Early Stage Startup Investors