The startup market has been hot lately as people are beginning to take advantage of the incredible investment opportunities they can make. In fact, according to research from FactSet, the number of companies that went public through an initial public offering (IPO) in 2020 doubled from the previous year with 494 IPO’s last year.
Finding new investments when it comes to startup companies can be challenging, with so many unknowns about the company. This makes it critical to know exactly what you are investing in and why.
Keep reading this investing basics guide to learn how to discover new investment opportunities in startups that can generate significant returns for your account.
Finding Your Niche
If you want to invest in startups like a pro, you should start by investing in companies that do business in an industry you understand. Different sectors will sometimes generate different results in metrics like
- Profit margins
- Operating margins
- Earnings per share
- Return on equity
- Return on investments
Knowing the investing basics like these metrics for a specific industry can help you spot investment opportunities as they arise. Also, knowing this information can help you avoid investments that are unlikely to generate a return.
However, you also don’t want to invest all your money in similar types of businesses that compete for the same market share. For example, if your niche is financial technology (fintech), you wouldn’t want to invest in all mobile payment companies. Instead, it would be better if you invested in complementary companies such as a mobile payment company, and a brokerage startup, or something similar.
You don’t want your niche to be too small to invest in all the same types of companies. But, you also don’t want it to be too general where you don’t understand the business and its product. According to recent research from CBInsights, 35% of startups fail because there was no market to support the company, and another 20% lost out to the competition.
Analyzing the Startup
Not you know what type of investment you’re looking for. It’s time to analyze the business and decide if it’s the right one for you.
There are a few components you will want to evaluate before making the initial investment.
- Funding – Do you have the funds needed to back the company? You will want to make sure you have the funds to distribute to the company without needing that money back for a period of time. Investing in a startup is different than investing in stocks. It can take years for your money to generate a return on your initial investment.
- Business – Is the company doing something innovative that can generate a return? Does the business have competition with similar products/ services? You will want to make sure the business idea is unique and offers value to consumers.
- Market – Will the market support the business idea? Are there consumers willing to purchase the goods/ services? Some markets are more complex to enter than others, and you should consider that. If the company is entering a market with challenging barriers to enter, you may want to reconsider your investment.
- Customer Acquisition – Does the business have a solid marketing plan in place? How will they reach potential consumers? These are essential considerations. A company can have the ultimate product, but if they don’t have a means of getting it into the customer’s hands, what’s it good for?
These are just a few of the crucial things you should consider before making your first startup investment. As a startup investor, you don’t want to waste your time and money investing in the wrong assets. Doing the due diligence beforehand and determining if the investment is suitable for you can help to avoid these mistakes.
Benefits of Investing in Startups
When you invest in a startup, you are becoming a part of the business. Just like when you invest in a company via the stock market, you are still buying ownership. But, investing in startups generally gets you closer to the action. Startups will typically acquire a larger ownership stake, giving them higher risk and a higher chance for reward.
Higher Reward Potential
Finding new investments in startup companies gives investors the ability to generate significant returns. When you invest in startups, you are getting in at the ground floor of some of the most innovative companies. Getting into an investment early can generate significant profits as the company grows and matures.
As a startup investor, you will meet founders, venture capitalists, executives, and other startup investors that can help you with your investments and allow you to learn more about the process from industry professionals. Networking can lead to new investment opportunities, new partnerships, and more.
Solving a Problem
Arguably the most satisfying result of investing in a new business is the potential to solve real-world problems. Maybe it’s something you are passionate about and want to advance the cause, or perhaps it just seems like a favorable opportunity to invest in. Either way, companies are being created and established every day by entrepreneurs looking to solve problems and offer value to consumers.
Risks of Investing in Startups
Although there are several benefits to invest in startups, they can also sometimes come with risks that investors should be aware of.
One of the biggest risks is the potential to lose your investment. With most investments, there is always the chance that your investment goes south and you end up losing everything. However, that risk is even more real with a startup company as the business is new and has not yet been established to generate revenue.
Another risk to consider as an investor is the time risk. A startup company will generally take a longer period of time to generate returns for investors than a company that’s already established with cash flows. If you might need the funds within the next few years, it’s probably not the best investment decision for you.
Discovering New Investment Opportunities: Getting Started
As a startup investor, it’s all about finding new investment opportunities that will generate significant returns over the years. One good investment can help to protect your portfolio from a few lousy investment mistakes. However, it takes research, diligence, and the right network to discover these rare opportunities.
If you are looking to discover new investment opportunities with startups, contact us today, and we can help you find the right investment for you.