What to look out for when investing in startups

With so many startups popping up everyday, choosing one to invest in can be tricky. In the UK alone, over 50,000 companies launch every month, while in the US it’s more like half a million. Everyone wants to spot the new Facebook or Uber, but venture investing can be a frustrating affair: before making any profit you’re likely to lose a big chunk of what you initially pump in. Successfully investing in early-stage startups is a real skill, there’s no trusted formula for success, and of course there’s an element of luck. However, there are some methods that help reduce risk and it good idea to leverage investing platforms that offer deeply vetted, direct investment opportunities. Before diving in, it’s important to get a grip on the fundamentals.

It has to be said, the stats make for depressing reading: nine of 10 startups fail, and most don’t make it past year three. This is a major reason to do your due diligence before throwing money at a company. Steve Hogan, co-founder and partner at Tech-Rx, offers this advice straight up: “The number one thing failed startups have in common is a single founder – this is the single biggest indicator of why they got in trouble. A co-founder can help address many of the trip ups including disharmony, hiring the wrong team, and poor marketing.”

Knowing the market is indispensable. It’s vital to look at the industry in which your prospective investment is operating. How big is your market? Has it been demonstrating year-on-year growth? How is the company performing compared to similar operations? Keeping up to date with what’s going on the relevant industry should come as second nature – you don’t want to invest in a sector just as it’s plummeting.

Paul Graham, an angel investor, says that after he sold his startup he wanted to get into startup investing, and despite the fact he’s now one of the best-known people in the sector, it took him seven years to build up steam. “I put it off because it seemed mysterious and complicated. It turns out to be easier than I expected, and also more interesting. The part I thought was hard, the mechanics of investing, really isn’t. You give a startup money and they give you stock.”

Now, the legal side of startup investing can really bog people down – they’re often complicated, and they’re constantly evolving as the industry progresses. Make sure to check the most up-to-date legislation for the country in which you want to invest. And don’t forget, a good lawyer you can trust in invaluable; it’s a good idea to have someone you can always call on before making any big decisions to check that everything is above board.

So what to do after you’ve actually made an investment? Congratulations, you’re a shareholder, but you need proof that you own shares, so get this in writing in the form of a digital or paper share document. You’ll naturally want updates from the company, afterall, your money is at stake, so expect to receive periodic reports. There’s a chance you might be asked to vote on major decisions as well, so be prepared to make your voice heard. Good luck!