Posted on : 23rd January 2023

How to Invest in Startups

There are many resources to guide entrepreneurs through the tough task of seeking investment. Investors, on the other hand, do not have this privilege yet, and they usually rely on their gut feeling while investing their money in a startup. It is crucial to remember that investment is not a gamble. Careful scrutiny can help you get the expected return on your investment and save you from incurring a big risk. Investing one’s money is not purely ‘artistic’, so to say. It is also ‘scientific’ when you know what’s up with the founder’s business plan.   

Here is a list of various parameters that you need to consider before investing your hard-earned money in a startup. 

1. Who is the founder?

This might perhaps be the deciding factor in your decision to invest. While some argue that the USPs of a product should hold top priority over such decisions, it might be too limited a view. This is because a product may be the most innovative one out there, but a startup would scale profitable heights only when its CEO is competent and dedicated. If the person directing the growth of a company doesn’t have any clear-cut objectives and goals, it is a red alert you need to be aware of. 

That said, a founder need not have any prior experience in how to start a tech startup, for example. You just need to analyze if the founder knows how to turn an idea into reality. At the end of the day, this is what startups entail, don’t they? 

1. Who all constitute the founder’s team? 

As much as the founder’s, their management team’s competence and dedication is also of major concern. When the ones actually executing the business plan of a leader are fully skilled, the startup and the returns thrive.   

1. What is the potential market of the startup?   

The market share of a startup plays an important role in its success. The founder should be able to envision their market growth in a few years from now. You should also scrutinize whether the startup satisfies the particular needs of customers and whether it is well received by them. 

Moreover, you need to have proper agreements in place for situations like the founder’s exit. This will help you ensure that the market growth is not disrupted in any way, along with your returns. It is also a better idea to invest in diverse startups. It would help you spread the risks.

1. How is the financing for the startup? 

You need to know whether the founder meticulously knows what are startup costs. They should be financially prepared. As it is, a number of startups fail because of the lack of funds. 

Conversely, you also need to be cautious if there are a lot of investors. It might reduce your returns. 

 

There are surely other parameters to be considered when you invest in startups; for example, your interest in the segment. The above-mentioned four parameters will pave the way for you.

 

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