Mar 22, 2021
6 Rules of Investing in Startups from VentureRocket Eurasia
Investing in startups means providing venture capital to startups that are considered to possess growth potential. As no one can guarantee that the chosen business undertaking will 100% succeed, investing in startups is a very risky endeavor.
As a first-time investor, you could try your fate and see if the chosen startup eventually manages to survive (not the best idea, is it?), learn what startups and how exactly to invest, by making your mistakes (which most likely will take much time), or understand the most important rules that will help you make educated investment decisions.
In this article, you’ll find our insights into the 6 secrets of successful startup investing. They will also come in handy if you’ve already had experience in startup investing (the more you know, the better, as they say).
Why Investing In Startups Is Worth Your Money?
- Investing in startups is for sure a risky endeavor. However, if the startup turns out to be successful, it will provide a bigger return on your initial investment, compared to most investments.
- Since startups need to hire people to survive, by investing in them, you contribute to the job creation in their region. Startups actually give a great percentage of job opportunities – in the US, startups cover 64% of new jobs, while in Europe, about 73% of all jobs are created by startups.
- By supporting startup founders, you inevitably become a part of their community, this way extending your network. On your way, you can also make other useful connections with other investors of the startup, service providers, and other community members.
- Investing in startups with great potential is your way of keeping up with the tech trends of the chosen industry.
- By providing capital to different businesses, you diversify your startup portfolio. Since about 40% of startups that are invested in bring profit, this way, you increase your chances of hitting ‘the right’ startup and making up for the losses provided by the portfolio startups that have already failed.
- Finally, it’s all about the idea you believe in. By investing in startups, you take part in building the future of your country or even the whole global industry.
Seems quite attractive, doesn’t it? However, there are some things you do need to take into consideration before you make up your mind to invest your money in a startup:
- Depending on their stage, startups, unlike other companies, are either only in their idea phase (which means they don’t possess either a functional product or any revenue) or have a product but are still cash-constrained.
- Unfortunately, statistics show that 90% of all startups fail during the first year, with the highest startup failure rate being presented by the information technology industry.
With this in mind, we do recommend that you do very thorough research on your startup before you decide to move to the next stage. Keep on reading to find our 6 rules of successful investing.
Rule #1. Do Not Invest In Projects You Don’t Fully Understand
This is the thing you should always start with – make sure you understand the project. For this purpose, you should cover checking:
✔ the startup’s idea. If you do not clearly understand the main idea and goals of the startup (or the startup team themselves can’t clearly explain it), you’d better not deal with it at all.
✔ the startup’s technology. To minimize your investment risks, you want to check the technology the project is going to operate on or bring an expert who will do this thorough check.
✔ the startup’s domain. It is crucial that you understand what market the product belongs to see if what it offers to potential customers is relevant and competitive enough. Besides, make sure you check the current competitors that operate in the same industry – it could turn out, the idea is not that unique.
Rule #2. Evaluate The Startup’s Team
When it comes to investing in startups at any stage of their growth, remember: you are investing not just in a great idea or a solid business plan, you are investing in people behind the product. That’s why the next crucial step is to thoroughly assess the management team of the startup.
Even if the leaders lack experience or expertise in something, a) make sure the team itself has someone who could cover these skills, b) focus on their personalities. Check the core team’s background, look through their previous companies and education, and make sure they possess important leadership qualities – flexibility, ability to accept criticism and learn new information, fast decision-making skills, out-of-box thinking, and more.
Rule #3. Check Other Investors Of The Startup
This step might be missed by many first-time investors. However, for the same reasons you analyze your startup, it is no less important that you also do your research on other investors of the chosen project. Investigate who other investors are and how successful their investment history is. Mind, that here we talk about both the current and previous investors of the startup.
Rule #4. Check The Startup’s Market Size
This is another important part of the startup’s due diligence process. However, before going all in to the market size, make sure you understand what problem the startup’s product solves. If it’s all good, you can move to the next step.
Estimating the market size usually includes defining the very market of the product, its market share, the target customers, the market volume, and its value. The market covers a specific category of products that a startup aims to deal with.
The market share means figuring out what part of that market can be accessed by the startup. Being realistic, you should understand that the startup won’t get its 100-percent market share. Usually, startups access between one and five percent of their target market.
To understand the target customers of the startup, analyze the profile of the typical end-user of the product and calculate the number of these potential users.
Finally, calculate the market volume and the market value, to define the potential market size of the project.
Rule #5. Go Over The Startup’s Financial Reports
To see if the startup makes solid financial estimations, it’s important to also check its financial predictions. However, we’d recommend that you review all their financial reports, both predictions they make in the business plan and their past financial reports.
This is important to understand a) how realistic the team’s financial assumptions are and b) if the capital the startup aims to raise will be enough to cover important milestones.
Rule #6. Identify The Two ‘Whys’
Here, we talk about answering the two very difficult, but important questions – why this startup will succeed and why it’s the right time to invest in it.
In our experience, to answer these questions, think of the timing, team, product, and business model of the startup.
Timing. Identify whether the market is ready for the startup’s product. Here, we talk not only about the potential users and if they are mentally/physically ready to accept and use the product, but also about the readiness of the current technology to implement the startup’s idea.
The team. As we have mentioned, the team is the core of the startup and a great part of its success is driven by the team members. Make sure the right people execute the startup.
The product. Are you sure the product does offer something really unique and valuable? Something that will outcompete other companies that produce stuff/offer services of the same type? Hope, you are.
The business model. If the startup has a strong strategy and a solid plan on how it’s going to make a profit, it’s more likely the startup will succeed. To maximize your investment success chances, deal only with the startups who have this solid business model in place.
Dealing With The Vetted Startups
Checking the startup’s team, market, technology, financial documents, current and previous investors, etc. is too much sweat/paperwork/time that may be spent on a failing startup? A great alternative to doing all this energy-consuming work may be dealing with the already vetted startups – those ones that have passed the due diligence process and have been verified by an Investment Committee. This is exactly what we do at VentureRocket Eurasia.
How We Check Startups At VentureRocket Eurasia
VentureRocket Eurasia is an ecosystem management and capital raising platform that connects verified tech startups, accredited, professional, and institutional investors, and ecosystem members in one place to create successful investment deals, facilitate the whole investment process, and help startups grow, by offering venture building services.
Before onboarding startups onto our fundraising platform, we carefully select startups from our network and thoroughly check them step-by-step. Our team arranges initial meetings with the promising startups interested in raising their funds, analyzes all business, financial, technical, and legal aspects, reviews the startups’ management teams, and presents them to our Investment Committee. As soon as the Committee approves the startup, we register it on the VentureRocket Eurasia platform. This way, we help you save lots of your time and ensure that the startup you are interested in is worth being invested in.
If you are interested to join VentureRocket Eurasia as an investor, feel free to register here.
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