With the rise of equity crowdfunding and the new opportunity in favor of smaller investments, 30-50 year old Americans have more options to consider when it comes to their investing dollar. Even the most financially experienced Millennials and GenX'ers who have paid off college loans, have a 401(k), and own some stock have a blind spot when it comes to these new forms of investing. They may feel that they do not have enough money or possess the knowledge to invest in startup companies. Here are 5 tips for new investors to consider before making their first startup investment.
Know where to start
You know you want to make an investment in startup companies, what do you do now? The first step in making any investment is knowing what your resources are. Go to places like equity crowdfunding sites, investment networks or syndicates, and research the methodology, success rate and the angel investors that take part. Building up your knowledgebase will help make you feel comfortable in this new realm of investing.
Do your homework
Before you can even think about making an investment, take a couple of weeks, or months even, and do your homework. Invest in industries that you care about or can foresee large growth in the years to come. Try to invest in companies that you can see yourself as an added value, or invest alongside people who will be the added value, to help move the company forward.
Once you are interested in a startup, it's important to think about the various factors of the startup, such a startup valuation. While there is no exact science to this and there is really no way of knowing 100% what the company is worth, as an investor you need to understand the potential worth of the startup, so that you can invest accordingly.
Be able to invest a small amount
With the new funding opportunities available to invest in startups, you can get your feet wet with as little as a $5000 investment. Once you figure out your personal strategy, you can invest in more companies, even within one platform. It is all about comfort level. What is also worth noting here is your portfolio management. Although it is smart for first-time investors to get involved with a smaller investment, you don't want to spread yourself too thin and invest in too many startups. You want to have a reasonable and responsible amount of startup investments in your portfolio alongside other asset classes to achieve balance and mitigate risk.
Of course, with every investment, there is uncertainty. Although you can get involved for a small amount, you have to understand the risk factor. There is always a chance, especially when investing in startups, that things can go south. Because of that, you need to understand the possibility of losing your invested money - often all of it.
Be prepared to be involved in an investment for several years
As you prepare to make your first startup investment, be prepared to be invested for several years. The return on investment can vary based on what exactly you invest in, so just be prepared to settle in before you see any financial gain.
This is also something to consider when you are determining how much you are going to invest. Especially with startups, ROI can take years and varies based on the company's exit strategy. You need to be prepared to not see any money back for a number of years.
Consult with experienced investors
Seek out investors that you may want to invest alongside, or speak to the platforms that are there and find your investment zone. This can also play a more personal role once you have an idea of what startup you would like to invest in. You may have the opportunity to speak with other, more experienced investors that are currently involved in the startup. If this is the case, you can not only get more knowledge about the company, but also receive some great insight from seasoned investors.