Investing in startups: a guide to success

Here we tell you everything you need to know about how investing in start-ups works, such as tips for success and information on the risks involved.

Tips for investing in startups

Below we give you 5 key tips on how to invest in start-ups. 

1. What is the potential for profitability? 

First, you need to make sure that the product or service being created provides value that can be monetized. In other words, potential customers must exist, and the customers who come in must pay for it. Customers should also use the product/service long enough to at least cover the cost of acquiring it.

2. Do everyone have clear job roles?

A start-up where one person handles everything, such as accounting, development, management and finance, usually feels less serious than a start-up with employees who each have their own tasks. In the beginning, it is common for one or a few people to do a lot of different things, but shortly afterwards, more people should be added to have their own specialties. It is also positive if the people working in the company have previous experience in the area they will be working in.

3. Take the long view

When you choose to invest in a start-up, it is rarely a straight line until the company becomes profitable and can stand on its own two feet. So think about the long-term goals of investing in start-ups. Think about the challenges the company will face along the way and whether you or someone in your network can help solve these challenges. Also, make sure the company has answers on how to solve these challenges themselves.

At the same time, it is important to set requirements for the start-up company. If you or other parties put money into the company, there should also be requirements for things that need to happen, such as milestones to be met and people to be hired. 

4. Ensure that legal provisions are in place

When you invest in a start-up, it is common that different owners have founded the company as private individuals, then set up a limited company and raised money from investors. If there are private links to the company, such as the name and/or certain programs or patents being owned by individual founders, this is likely to lead to problems in the future. 

Therefore, make sure that all important intellectual property rights are in place in the company you invest in. Also make sure that clear agreements are in place for salaries, bonuses and non-compete clauses, among other things. 

5. is there a clear objective?

Make sure there is a clear objective for the start-up, such as a vision of a future IPO, sale or other form of exit. However, it is important to remember that not all entrepreneurs are aiming for a big exit - some want to focus instead on building a long-term solution to a problem. This is not necessarily a disadvantage, but as an investor you should consider how you will get a return on your investment, either through a future exit or through the company's profits and dividends.

Many investors in startups have experience of exiting from previous companies, and this knowledge can be valuable in supporting the startup in planning for an exit strategy or other long-term goals.

How to invest in start-ups?

You can invest in start-ups in several ways. The most common ways to invest in startups are to:

• Making a direct investment, such as buy unlisted shares or other securities. Normally, making an investment in a start-up requires both contacts and a lot of money. 
• Using a crowdfunding platform where many smaller investors come together and fund a start-up they believe in. However, the companies on these platforms should be treated with extra caution - why haven't they managed to get investors elsewhere?
• Buying venture capital funds that invest in different start-ups on your behalf. By owning a venture capital fund, you own shares in many different start-ups, which means that your risk is spread. Keep in mind that the fund charges a fee for managing your money. You also have little control over which start-ups are invested in if you buy venture capital funds. 

What are the investment phases of a startup?

A startup can be in different investment phases, which are: 

• Seed funding (also known as seed investment), which provides initial capital that is normally between $50,000 and $2 million. 
• Series A round, where the startup has a business model and a larger amount of customers. 
• Series B round, where the start-up is relatively well established and typically receives investments of between $10 and $20 million.
• The Series C round, where the startup has grown big and wants to expand. The company is typically valued at $100 million 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 usually only required if the company has not reached its targets in the Series C round and therefore requires more money. 
• The Series E round, which is a sign that the company is not doing well and failed both the Series C and Series D rounds. The Series E round is more or less an emergency package that allows the company to survive for a while longer. 

Benefits of investing in startups

1. Opportunity for high returns

When you invest in a start-up, there are opportunities to get a big return on your capital. So a small investment can yield a big return if the start-up's product is successful in the market. 

Facebook is a typical example of a start-up where early investors have recouped their investment hundreds, sometimes thousands of times over. 

2. supporting entrepreneurs

By investing in a start-up, you benefit and support entrepreneurs to turn their ideas into reality. Being part of a project that develops, for example, a ground-breaking car battery for electric vehicles gives back more than just money. 

3. spreading your risks

Putting money into start-ups is a good way to spread your risks. For example, if you have a lot of listed shares that move slowly, a riskier investment can be a good addition to your portfolio to diversify.

Want to invest in startups?

We offer a unique deal flow with many exciting startups in different growth phases. If you have at least 500 000 SEK to invest in this type of investment, please contact us and we will give you more information about the entire investment process. Email us at [email protected] if you want to hear more about this.

Disadvantages of investing in startups

1. Startups are a high-risk investment

Investing in start-ups should be considered a high-risk investment that in many cases fails in the first year or two. So while the potential payoff is huge, many people lose their entire stake when investing in startups. 

2. liquidity is usually low

The liquidity of shares in startups is rarely very good. In simple terms, this means that there is not much trading in the shares of a start-up company. This means that in many cases it is difficult to sell your shares when you want to, which can be compared to shares in a listed company where it is very easy to sell your shares. 

3. difficult to get the right information

When investing in start-ups, it is difficult to get accurate and complete information about things like the company's history and assets. So it's much harder to do a proper risk analysis, as you might do if you're thinking of buying shares in a listed company, for example. One way to counter this is to try to get a seat on the company's board if you're making a major investment.