Invest in Startups, Keys and Tips
Investing in startups is an emerging alternative to investing in capital. The options are increasing and more and more investors are deciding for this modality to make their money profitable.
During 2018 more than 1,000M euros were invested in startups. This data evidences the current growth of both the number of startups in Spain and the increase in investment in Spanish startups. This type of investment involves investment funds, experts in finance and the business sector, as well as private investors. More and more private individuals are interested in this type of investment instead of investing in other, more traditional sectors.
If you don’t know what to invest your money in and you are thinking of investing it in a startup, we will tell you about the main investment modalities and some recommendations.
What is a Startup
A startup is a company in the early stages of creation that is characterized by three main properties: novelty, technology and growth potential.
Therefore, what differentiates a startup from other start-ups is the scalability of the business based primarily on technology. The use of this terminology is temporary as these businesses are created with the expectation of exponential growth, and when the startup acquires a large size is no longer called within that terminology.
Why invest in a Startup?
It is an investment alternative with great potential for profitability. It is a modality for those people who want to become part of a board of directors and participate in the decision-making of the company. You must bear in mind that this is a long-term investment with a high risk. Here are some tips to help you in your investment.
Tips for investing in startups
Here are some basic recommendations if you’re thinking of getting started in investing in startups.
- Value the high growth potential of the chosen startup.
- Get to know the internal part of the startup: Team, Management, business idea…
- Diversify your investment. Not all startups achieve their goal so diversification is one of the essential requirements. This way, if any of the startups where you invest goes bankrupt, you will be able to compensate the loss with another operation.
However, these investments have some drawbacks that you should also consider.
Some drawbacks of investing in startups
We leave you with three disadvantages of investing in startups.
- Generally, there is more demand than supply.
- The risk is high. Investing in startups carries a high risk, and is generally linked to a great analysis and knowledge of the sector.
- Liquidity, there is no continuous market in which to sell the participation. So you have to be clear that to make the investment profitable you have to invest in the long term.
Once you know in general terms the investment in startups and their main advantages and disadvantages, we focus on the investment operation, we tell you how to invest and the options available to you to invest your savings.
How to invest in startups
More and more investors are looking to invest in specific projects and control their own investment portfolios. Currently there are several options to invest in startups, we tell you the steps you must follow:
- Select the platform through which you want to invest. Check well the costs involved and the individual characteristics of each platform, it is better not to take surprises once the investment is made. You must check that the platform is registered with CNMV.
- Select the startup sector. All startups share the technology but it is important that you also analyze the sector in which it operates.
- Select the startups in which you want to invest. As you know it is important to diversify so it is better to select more than one startup.
- Decide how much money you are going to invest. It is important that you don’t need this money in the short term. Once you are clear about the total amount you want to dedicate to investing in startup, choose what percentage you are going to dedicate to each one of the companies.
Here are the options available to invest in startups
Options for Investing in Startups
Investing in startups is a synonym for investing in entrepreneurs. Business angels are an important pillar for most entrepreneurs and, consequently, for startups. Business Angels are usually economic experts with a great deal of experience in the business sector. A Business Angel studies the idea, the feasibility of the project and usually invests large amounts of money. In addition, they not only help financially, but also contribute their business knowledge and network of contacts.
It is an emerging possibility to invest in entrepreneurship. Through the equity crowdfunding platforms, entrepreneurs look for financing and resources to launch or grow their project, to achieve this they offer participations in the company for interested investors. In this way any person can become part of the company with reduced capital contributions. Profitability in this type of investment is obtained by distributing dividends.
This modality is not unique for startups, but is intended for all kinds of people and companies. However, some platforms are mainly focused on investing in companies. Through crowdlending companies and startups can obtain financing through the contribution of multiple investors who obtain a return in the form of interest rate in exchange for lending their money.
You can find three different options to invest in companies:
- Invest in high profitability. In this investment product you can invest in companies with a lower risk than in the case of equity crowdfunding, since in this type of operations the consideration is determined at the beginning and you don’t have to wait for the startup to grow but the terms are limited at the beginning. In addition, the repayment of installments plus interest is usually done monthly, so you start to recover your investment from the first month.
- Investment insured with SGR guarantee. This product is similar to the previous one but with a much lower risk since the operation is guaranteed by a Reciprocal Guarantee Entity that takes charge of the operation in the event of non-payment. The terms are a little longer than in high yield investments, the usual total term is 3 years.
- Short-term investment in factoring. To diversify your portfolio in the short term, you can choose to buy invoices from companies in exchange for a return on your money.