Sunday, April 14, 2019

How to Invest in StartUps

How Start-ups Investment Works

A group of investors tend to get together with a concept to an innovative solution weighing all the pros and cons to their new innovation. They come with some concept which would work and provide the revenue with their concept. The innovative idea then goes to the next level of turning it into a business and then goes to fulfill their goal of that idea. Here the need to obtain advice is essential from experienced entrepreneurs who have met success in the same field. To invest in initial stage startups there are two options:

  • To invest in a priced equity round, wherein the investor purchases shares in startups at a fixed price 
  • To invest in convertible securities wherein the amount of investment ultimately gets converted into equity. Capital – Needed Element
In the initial stage of startups, investors tend to depend on family, their colleagues or close acquaintances. However there could be some restrictions as to the number of individuals who could invest in these startups. This is due to legal limitations according to Legal Zoom. To start a business, capital is the much needed element and personal savings and personal borrowing are said to be the most two common possibilities for the same.

Personal savings are of two types namely cash and cash equivalent saving and retirement account. While personal savings could be utilised, the need of borrowed fund does not arise since the funds are already available for the start-ups. However there is a risk here since very often investor may not have the necessary subsidy for the startups. Moreover it could also be a gamble on investing their entire savings which may or may not succeed. The said funds could at a later stage in life,be utilised during retirement, or for any other purpose.

Personal borrowings could be beneficial for businessmen with good credit scores together with high personal disposable worth. Funds for the business can be obtained by way of personal loan or by applying for a new credit card. Here the possibility of the risk could be delay on payments, lowering the credit score and getting into further debt.

Crowdfund Capital Advisors – Crowdfund Investing Company 

As per Crowdfund Capital Advisors a crowdfund investing company, over 1,000 companies had registered with the SEC to raise subsidy on online portals where $137 million had been dedicated to such start-ups. Several start-ups had been subsidized in 80 various industries extending from restaurants to salons to logistics businesses. Some new portals such as Microventures, NextSeed, Republic, Seedinvest, StartEngine together with Wefunder, assist distinct investments in start-ups.

Progress Prudently & Cautiously

Some startups could generate disruptive novel products which could improve the economy. And an investor could face some risk by investing if he does not progress prudently and cautiously in the investment. Recent research has portrayed that more than 94% of fresh businesses tend to flop in its first year of startups. One of the common reasons is the deficiency of subsidy wherein money tends to play an important role in any business. Capital is the essential element which moves from a given idea to revenue generating business. Most of the entrepreneurs tend to get stuck due to this deficiency in their business. In startups, investment could be worthwhile personally as well as financially wherein there is a contribution in capital formation and creation of a job.

Concerns While Investing 

The following concerns need to be considered while making an investment in any startups business:
  1. Investment should be done in an area one is familiar with. It is the best option of reducing the risk and one should have an understanding of the market that the start-ups functions in. One must have a better insight while projecting the probable success of the business. One should also ensure that the business in question tends to have a mountable model enabling it to grow to a point which would provide the revenue back that had been pooled in investing. A couple of years back, Securities and Exchange Commission had employed certain procedures in enabling businesses to raise funds by means of crowdfunding for those interested in making an investment for start-ups. 
  2. You should do your own research in obtaining information and conduct your own diligence by scrutinizing the main documents, and ask questions regarding the management team.This will enable the investor in influencing your decision on the startups. 
  3. In order to consider which entity one should use in making the investment, the investor needs to consider certain factors like the tax structure, its investment portfolio, personal conditions. Funding in startups can be done by sole person or through family trust or Individual Retirement Account – IRA. 
  4. Before making an investment in any start-ups businesses, one should ensure to complete some of the paperwork needed like an ascribed investor questionnaire together with verification of the investor’s identity prior to investing into the company. 
  5. While investing, the procedure is to get into a signed agreement with the party concerned, which set out the terms of the agreement. The document in some cases are held in bond till certain criteria are fulfilled 
  6. Based on the arrangement of the deal, the investor can transfer the resources to an escrow account for security that is held by a third party till the release of the fund to the company when some of the conditions are completed. 
  7. The documents and/or funds are released to the company when the conditions of the bond are fulfilled. Take Stock of Expertise & Expectations
Opting for an investor is more important than obtaining the required subsidy. It needs a certain amount of commitment. According to Entrepreneur, one needs to take stock of the much needed expertise together with the expectations before approaching a certain investor. One should consider the recent dealings, together with the services provided, the expectation they may have for the leaders of the company and the level of involvement required in the overall operation of the company. It is also essential to have a definite exit strategy in order, for any kind of investment, especially in the case of start-ups. Investors need to be transparent on how and when they would be in a position to withdraw their initial investment together with the related gains.


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