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How to Invest in Startups: New Advice for 2017

This article is for you who wants to be in it from the start, for that part of your portfolio you wish to dedicate to interesting high-yielding ventures. Buying shares in a start-up can be a risky but quite rewarding exercise, and we are going to help you get started.

HOW DO YOU CHOOSE A START-UP TO INVEST IN?

There is a stream of interesting firms out there that are just getting started, and one of them may be the next “unicorn” 1 billion firm. As with all choices, you need to start by delimiting. In which sector do you see the biggest potential and growth possibilities?

Let’s assume you choose the tech sphere and Artificial Intelligence. There are quite a few interesting firms in this sector, and your job now is to find the different platforms where they operate, make a list and based on your investment criteria choose the one that fits the bill.

This may sound as common sense, but your choice of sector is an important one. If you choose to invest in an industry that turns out to be a failed trend, you could find yourself in a situation where you lose all the money invested in the start-up. Do you wish to delimit yourself to IoT (the Internet of Things), Virtual Reality, new types of medicines or all of these? Or something entirely different?

Another issue in terms of selection is choosing the correct niche and management. One case in point regarding when such a choice is paramount and went wrong for a lot of people is the IT-boom of late nineties: the idea was sound, the one of IT leading the next industrial revolution (now termed the digital revolution), but not the bloated valuation of a lot of firms with no solid business model or bad management.

HOW DO I FIND A START-UP TO INVEST IN?

Start-up firms are usually found in and via:

  • Incubators. Incubators is a buzzword that simply means a company, institution or other that has and offers a structure that helps firms out in their first months or years of existence. The services incubators offer is legal advice, marketing help etc. Start-ups in incubators usually seek out angel investors and larger funding opportunities in return for equity stakes in these firms.
  • Crowd-funding sites. Crowd-funding sites and so called Kickstarter sites online offer smaller projects and start-ups with gaining funds from public individuals. Such investments most often do not entail equity stakes in the firms that are being invested in; there are however those that do, and they can offer you a unique opportunity to invest in a start-up without having to invest a large amount of money. One of the pros with crowd-funding online services is that they are international and thus offer a larger pool of start-ups than local or national incubators can.
  • IPOs in smaller lists. Once start-ups reach a certain momentum in their business and are stable enough (more or less), they can seek out capital by getting listed in smaller lists, e.g. niche stock exchanges. This will entail buying the stock of the company as with regular stock trading. There are cases where a start-up is funded via hedge funds and venture capital firms; to invest in these particular start-ups, you can do so indirectly by buying shares in the hedge funds or venture capital firms in question.
  • Private start-ups. Not all start-ups want external money, influence or help. These firms are very difficult to get invested in. One can try to invest in these companies by doing so directly via larger equity purchases; you can do this by simply contacting the founders of the start-up you are interested in and offer them to buy equity. If you do not invest directly, then you can do so indirectly by investing in distributors or suppliers of such firms or close substitutes. Seeing as a start-up is fairly unique in comparison to other more established firms, it will be difficult to find substitutes.
  • Joining a Venture Capital or Angel Investment project. If you have found a project that is just starting or has just gotten started, you can try to join in by offering to buy into the project and buy equity that way.

HOW DO I INVEST IN START-UPS?

The ways in where to find and buy into start-ups have been outlined above. Investing in a start-up usually means buying equity. Which type of start-up you manage to buy into depends on how much money you have to invest with, and in certain cases what type of competence you can contribute with for the company you are investing in.

Large equity investments (e.g. angel investment) and possibly a good network and/or a specific competence in the niche area of the start-up may be required when investing in this type of unlisted start-ups. This applies to those that are run privately or via incubators.

Small equity investments for smaller trades can be done in start-ups that are about to be listed in niche lists. You can keep track of such IPOs via stock broker websites or general market websites. If you have an account with a stock broker, you will probably receive invitations to invest in a niche IPO. As mentioned earlier, there are crowdfunding websites that can help you invest smaller sums of money when buying equity in start-ups.

The points above are not clear cut. If you by chance manage to invest in a start-up via a Venture Capital project, the equity needed may be large but not necessarily depending on what the parties involved agree to.

SUMMARY

Choose a sector or niche you believe will lead to major developments in the future, decide on the amount of money you are willing to invest and choose the type of platform you wish to engage in to find start-ups. Be ready for an interesting investment journey; some of the investments may be duds, as most companies are not unicorns. But one of them will hopefully be the next Facebook or Uber.

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