How to find startups to invest in
Finding the right startup to invest in is very difficult and can be a high-risk activity for the uninitiated as a large percentage never raise enough funds to succeed. Startup investments are generally not trade-able like stocks. You should expect to hold onto your investment until the company goes public or is acquired.
Can an average person invest in startups?
The short answer is Yes, however, whenever, wherever and however you decide to invest do your homework first. There are a few ways the average person can invest;
- Directly in the startup.
- By joining an investment group, often called ‘Angels’. The group reviews proposals from startups and offers some of the startup an opportunity of raising funds from its members (Angels).
- Through a fund that consolidates investments from many people and invest in startups that the fund chooses. These types of funds accept smaller amounts (investments) from the public as opposed to a direct investment where the startup may have a minimum amount it will accept. Funds of this type allow average investors the opportunity to diversify their investment across a number of startups and potentially reduce the risks involved.
Several countries, including the USA and Australia have made it possible for the average investor to invest in this type of fund. Some of the funds available in the USA include,
is a crowdfunding platform that allows individuals to invest in early-stage companies that have been pre-screened for potential viability. According to SeedInvest, less than 1% of companies that seek funding through the platform are accepted.
WeFunder has a stated goal of funding more than 20,000 startups by the year 2029. It hopes to do this by accepting investments of as little as $100 at a time.
Republic is another online platform that allows individual investors to purchase a stake in early-stage startups. It allows you to get started for as little as $10.
Microventures is a platform allows for early-stage and late-stage startup investing for as little as $100.
- Crowdfunded Equity is a method that has gained popularity over recent years. Startups post their offer and details on a crowdfunding platform and seek investment from the general public. Crowdfunding equity platforms usually require formal government approval before they allowed to post offers by startups. Some examples of companies offering this service are;
- Equitise (Australia)
- Onthemarket (Australia)
- CrowdfundUSA (USA)
- Birchal (Australia)
- SeedInvest (USA)
- Startengine (USA)
The above are just a few of an ever-increasing number of companies.
What signs should I be looking for when investing in a startup?
Picking a startup to invest in is a difficult task. I recently spoke with an Investment Fund manager who receives 800 proposals from startups every month from which they will choose one or two to take to Due Diligence before they invest. Some of the points they look for are:
1. Unique Product
If the startup has something unique that allows the company a competitive advantage over others in the same market.
Is the product and scalable, i.e. will sell and can the market and the company handle growth?
3. Market Size
Does the market that the startup has targeted have a huge potential?
4. The Team
Is there a dedicated management team? Does it have the skills to realise the business plan?
Has the startup achieved any sales?
Is the outlook positive and do you believe they can achieve it? Are there any possible hurdles that may arise e.g. competition, government legislation changes, sovereign risk etc?
7. Ownership for Sale
Is the price asked for the equity on offer good value?
8. Use of Funds
Are the funds being raised enough to carry out the Business Plan or will more be needed. If more is needed your equity will be diluted at that time, i.e. your percentage ownership will be reduced.
9. Financial/Business Plan
A comprehensive, well thought out Business Plan will tell you a lot about the company, the product, the team and the future. Conservative and achievable forecasts, expenses, and projected margins can provide you with a view on the feasibility of the startup and its future potential.
What Questions should I ask before investing?
Financial questions to ask
- How much money is the startup trying to raise?
- Who has invested already?
- Are there any well recognised investors or investment funds who have already invested?
- What is the likelihood of raising the total asked for?
- What will the money be used for?
- How much have the current business owners invested of their own money?
- Has the company generated any revenue?
- How long will the funds that are being raised last?
- What do the financial forecasts look like?
- Is there any debt in the company?
- If there is debt, is it secured or unsecured?
- Are there any 3rd party financial agreements or arrangements?
- What does my investment buy me? (i.e. what percentage of the company).
- Is the equity on offer the same type of share classification as the founders?
- Does the startup have a ‘Term Sheet’ explaining the offer and what you will receive?
Idea related questions to ask
- What is the problem or pain points in the market that it is solving?
- What is the unique selling proposition?
- how does it deliver value to customers?
- What stage of production is the company at, i.e.
- product validated by end users
- orders received
Business questions to ask
- Does the startup have a Business Plan?
- Does the startup have a Marketing Plan?
- How well has the market been researched?
- Who are the competitors?
- What is their pricing model?
- What is the startups pricing model?
If you are satisfied with the answers to all your questions and feel that you would like to proceed DO NOT JUST HAND OVER THE MONEY. The next step that is crucial is called Due Diligence, a process that requires you to examine as many background and supporting documents that the startup has to enable you to verify the claims and statements that have been made in its investment pitch to you.
If there are other significant investors i.e. people, whose judgement you trust or independent investment companies you may join with them to carry out the Due Diligence phase.