Investing In A Start-Up? Read This First!

Not all that long ago, it was extremely rare to hear about any angel investors pumping capital into a new start-up in an effort to set wheels in motion. The risks involved were great, not to mention all the extra “safety net” legal fees that came with it. However, as online investing has become more and more accessible, a lot of start-ups are enjoying a great little booster from angel investors. If you’re thinking of investing in a start-up, here are some tips to follow…

Write Your Investments Off Mentally

Seen as you’ve made it to this post, I’ll assume you know something about the massive risk tied to new businesses. The large majority fail in their first year, and those that don’t are still in a very precarious position. Whether it’s a business model that’s been around for a century or something tied to an emerging niche like telemedicine technology, it’s a simple fact that the company is going to carry a significant degree of risk. While you can study the industry and apply at least a little strategy that will mitigate some of your risk, it’s important to realize how high your chances are of losing everything you invest. Only bet what you won’t miss, and try to think about your investments as if they’re already written off.

Use the Right Tools

Image source: Pixabay

If you’re thinking about investing in a new business, you probably already know something about how normal shares and bonds operate. However, when you get into start-up investing, there are a wide range of other financial instruments which you’ll need to learn about if you want any real success. Convertibles, most notably, are becoming the norm when it comes to start-up investing. Convertible loans or convertible equity have many advantages over your standard options. These loans accumulate interest over time, and are ultimately converted into shares. The conversion itself happens during the first major equity investment round. Here, any convertible investors will get the shares used in the price of this investment round. Of course, because they invested in the company much earlier, investors get a pre-arranged % off of the price they pay. If you’re finding any of this confusing, be sure to read more on convertible loans before making any solid plans.

Set Up Good Communication

If you’ve only ever invested in shares from listed companies, then you’ll probably be used to being able to click a mouse and see the daily share price of a given stock, along with all the relevant economic news. This isn’t possible when you’re investing in start-ups, so you need to take a different approach to establish a dependable channel of communication. Time is of the essence for small business owners, and every moment they spend talking to their investors is a moment they could be using to grow their business and undermine the competition. While it can be hard to build trust with the business’s higher-ups from day one, you still need some degree of communication. I recommend starting off with monthly meetings and taking it from there.