Previously, as an entrepreneur, you may have gone out and looked for investors yourself, but now you are on the other side of the table. Investing in startups can be an exciting new adventure for you.
Find the right promising businesses and enjoy financial returns and impressive innovations within the sector. In this article, we discuss how you, as an SME entrepreneur, can invest in startups yourself. What are the opportunities and challenges?
[1] Preferred industry and startups
As an investor, you undoubtedly have a preference for a sector. Have you been active in the agricultural sector for years? Then investing in a fashion business might be a long way off. Choose a sector in which you yourself have gained sufficient knowledge and expertise to make strategic choices. This will help you assess the potential of startups and enable you to provide support. Don't be impulsive in selecting businesses, take enough time to research the market potential and make an informed choice.
[2] Diversification
Don't put your entire wealth into one startup. Although it is not the casino, it is wise to spread your chances. By diversifying your portfolio across different startups, each with its own challenges and opportunities, you increase the likelihood of positive returns.
[3] Due diligence is priority
Conduct thorough due diligence before engaging with any party. Having background research done by a professional will put the viability of the startup of your choice under the microscope. Study the business plan, speak with the management team, check the backgrounds and dive into the numbers. It helps to have outside experts look in, so you don't get swayed by your emotions.
[4] Be aware of the risks.
An investment is not all sunshine and roses, because it can also be quite disappointing. Investing in startups comes with risks, so be realistic and allow for a period of time that does not yield immediate returns. And besides, not all investments pay off financially. That, unfortunately, is part of the investment process.
[5] Look beyond just a capital injection
As an investor, you have valuable knowledge and experience that is unique. Don't be afraid to share this with the startups you invest in. Financial support is tremendously nice, but the right coaching, connections and knowledge may be worth even more! By actively doing your part, you are not only helping the entrepreneurs, but ultimately yourself.
How can you invest in businesses?
After all these useful guidelines, you obviously want to know how to invest in businesses. There are several options, depending on the size of the investment, the type of business (in this case startups) and your personal preferences. Here are the most common forms of investment:
- Angel investment, where you as an entrepreneur invest money in exchange for shares in the startup. Whereas as an entrepreneur you would want as little control as possible from an investor, now that you are on the other side of the table, it is smart to acquire as much control as possible;
- A convertible loan is also an increasingly common form of financing. This hybrid form is attractive to you as an investor because you are somewhat protected if the startup's intended successes fail to materialize;
- Venture capital is a high-risk loan to a startup. You don't know if the business plans will actually be realized. However, as an entrepreneur, you often have the scope to provide strategic guidance, so you yourself have a finger in the pie;
- There are also several crowdfunding platforms that offer the option to invest in startups. There are several types in the world of crowdfunding, but equity-based crowdfunding is still the most well-known form of investment. As an investing entrepreneur, this brings you dividends, so the fledgling business begins to grow.
There are many options and probably many startups waiting for an investor. Be aware of the challenges, opportunities and consequences and explore your playing field. It would be a shame if you impulsively step into a project and don't get a return.
