Here we tell you everything you need to know about how investing in startups works, such as tips on how to succeed and information about the risks involved.
Tips for investing in startup companies
Below we give you 5 important tips on how to go about investing in startup companies.
1. How great is the potential for profitability?
First, make sure that the product or service being created delivers value that can be turned into money. In other words, potential customers should exist, and the customers who come in should pay for it. Customers should also use the product/service long enough to cover at least the cost of acquiring the customer.
2. Does everyone have clear roles?
A startup where one person handles everything, such as bookkeeping, development, management and finances, generally feels less serious than a startup with employees who each have their own task. At the beginning it is common for one or a few people to do many different things, but shortly afterwards more people should join who get their own areas of specialisation. It is also a positive sign if the people working in the company have previous experience of the area they will be working in.
3. Be long-term
When you choose to invest in startup companies, the road is rarely straight to the point where the company becomes profitable and can stand on its own feet. So think about the long-term goals if you invest in startup companies. Also consider which challenges the company will encounter along the way and whether you or someone in your network can help solve those challenges. Also make sure the company has answers on how it will solve these challenges itself.
At the same time, it is important to make demands of the startup. If you or other parties put money into the company, there should also be requirements for things that must happen, such as milestones that must be met and people who must be hired.
4. Make sure legal provisions are in place
When you invest in a startup, it is common for different owners to have founded the business as private individuals, then started a limited company and taken in money from investors. If there are private ties to the company, such as the name and/or certain software or patents being owned by individual founders, this will probably lead to problems in the future.
So make sure that all important intellectual property rights are held by the company you invest in. Also make sure there are clear agreements on, among other things, salaries, bonuses and non-compete clauses.
5. Is there a clear objective?
Make sure there is a clear objective for the startup company, such as a vision of a future IPO, sale or another form of exit. It is important to remember, however, that not all entrepreneurs aim for a big exit – some instead want to focus on building a long-term solution to a problem. This need not be a disadvantage, but as an investor you should consider how you will get a return on your investment, either through a future exit or via the company's profits and dividends.
Many investors in startups have their own experience of exiting previous companies, and this knowledge can be valuable in supporting the startup in planning an exit strategy or other long-term goals.
How do you invest in startup companies?
You can invest in startups in several ways. The most common ways to invest in startups are to:
- Make a direct investment, such as buying unlisted shares or other securities. Normally, both contacts and a lot of money are needed to be able to make an investment in a startup.
- Use a crowdfunding platform where many smaller investors join together and finance a startup they believe in. You should, however, be extra careful with the companies on these platforms: why have they not managed to bring in investors elsewhere?
- Buy venture capital funds that invest in various startups on your behalf. By owning part of a venture capital fund you own parts of many different startups, which means your risk-taking is spread. Bear in mind at the same time that the fund charges a fee for managing your money. Nor do you have much control over which startups are invested in if you buy venture capital funds.
What investment phases does a startup have?
A startup can be in different investment phases, which are:
- Seed financing (also called seed investment), which provides initial capital that is normally between 50,000 dollars and 2 million dollars.
- The Series A round, where the startup has a business model and a larger number of customers.
- The Series B round, where the startup is relatively well established and normally receives investments of between 10 and 20 million dollars.
- The Series C round, where the startup has grown large and wants to expand. The company is normally valued at 100 million dollars or more at this stage.
- The Series D round, which is an investment round that normally has a negative impact on the company. A Series D round is generally only needed if the goals of the Series C round were not met and more money is therefore required.
- The Series E round, which is a sign that the company is not doing well and has failed with both the Series C and Series D rounds. The Series E round is more or less a rescue package that keeps the company going for a while longer.
Advantages of investing in startups
1. Opportunity for high returns
When you invest in a startup company there are opportunities to get a large return on your capital. A small stake can thus give a large return if the product the startup company develops succeeds in the market.
Facebook is a typical example of a startup where the early investors have got their investments back hundreds, sometimes thousands of times over.
2. You support entrepreneurs
By investing in a startup you benefit and support entrepreneurs so they can turn their ideas into reality. Being part of a project that, for example, develops a ground-breaking car battery for electric cars gives back more than just money.
3. You spread your risks
Putting money into startups is a good way to spread your risks. If, for example, you have many listed shares that move slowly, a riskier investment can be a good complement to the portfolio to make it diversified.
Do you want to invest in startups?
We offer a unique deal flow with many exciting startups in different growth phases. Feel free to get in touch with us if you have at least 500,000 SEK to invest in this type of placement, and we will give you more information about the whole investment process. Email us at info@eqvor.com if you would like to hear more about this.
Disadvantages of investing in startups
1. Startups are a high-risk investment
Investing in startups should be regarded as a high-risk investment that in many cases goes under in the first or one of the first few years. So even though the potential payout is enormous, many people lose their entire stake when investing in startups.
2. Liquidity is usually low
Liquidity in startup shares is rarely particularly good. Put simply, this means that there is not much trading in a startup company's shares. This means that in many cases it is difficult to sell your shares when you want to, which can be compared with shares in a company listed on a stock exchange, where it is very easy to sell your shares.
3. Hard to get the right information
When you invest in startups it is difficult to get correct and complete information about things such as the company's history and assets. It is therefore much harder to make a sensible risk analysis of the kind you can make, for example, if you are thinking of buying a stake in a listed company. One way to counter this is to try to get a seat on the company's board if you make a larger investment.
