How to Invest in Startups

How to Invest in Startups Correctly: Analyze the Main Points

The now popular word “startup” means a business project that is relatively recently created or is at the development stage. For the sake of further development, they are looking for investors. And they invest capital in start-up businesses to receive a large percentage of profit under the contract in the foreseeable future for participating in the financing. Let’s take a look at some of the features regarding investing in startups together.

 

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How to Invest in Startups?

Many people tend to invest in startups, planning to get high returns. However, venture investments are not available to everyone, because of the large amounts of minimum investment, usually, talking about several tens of thousands of dollars. But it is still possible to “reach out” to companies traded on American stock exchanges. To do this, you need to open an account with a broker that will allow you to purchase shares of startups from the United States. Almost anyone can invest in this way since the minimum investment amount is equal to the value of one share – approximately $10 per share.

By the way, investing in Internet startups is gaining popularity. And not to the company itself, but to a specific website. To do this, you need to delve into the ways of monetizing the site to discuss the conditions for investing in a startup and make sure that the idea is profitable. Moreover, the investor takes an active part in the development – interacts with the manager, and experts help to draw up a business plan and engages in strategic planning. The success of a startup depends directly on the degree of trust, the objectivity of the information provided, and the rationality of investments.

How Does This Happen?

A deal with a startup can be formalized in several ways:

  • buying shares;
  • SAFE;
  • conversion loan.

In general, a startup has certain obligations to the investor.

As for the investor’s earnings, most often investments in startups involve earnings on capitalization and not a dividend model. The investor invests and expects the sale of his share. In practice, this takes 3-10 years. Share buybacks can occur through the sale of a business, new rounds of investment, the company’s funds, or existing investors. Despite the high risk of such an investment and the long waiting period, earnings can be x10, x100, and even x1000.

Where to Look for Startups?

Usually, founders themselves look for investors, as they need money. To do this, they decide how to present their project and to whom – a business angel or an investment fund. However, the investor himself can also look for startups. There are several options:

Through crowdfunding platforms. Startups place their investment proposals on a licensed platform, and investors evaluate them and decide where to invest.

Become a member of the Business Angels Association. This is how the investor enters the community, where the founders themselves “bring” their projects. There he can get additional expertise on the investment process.

Invest with venture capital funds. They also exist in the form of mutual funds, mostly closed-end.

What Can You Get After?

There are several ways to make a profit by investing in a startup.

  1. Sell your stake in a startup to founders at a later stage of development. Income is generated through the development of a startup and the natural increase in its value.
  2. Sell your stake to another investor at later stages of the startup.
  3. Start receiving dividends. This happens when a startup enters an IPO if the startup is successful and develops further.

In general, if the startup in which you have invested will be successful and will develop further over time, then you just have to wait for dividends after some time, as happens in all cases of proper investment.

On the one hand, investing in a startup seems like a lottery. On the other hand, investing is also a profession that you can learn. For historical reasons, it is worth learning from more experienced investors, since they know most of the necessary nuances. So it is definitely worth the risk if you are confident and ready to receive a large cash reward in the form of profit.

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