The 5 Best Tips for Investing in Startups

Investments in startups and growth companies are exciting, but they also bear certain risks. After all, startups are in the initial phases of business development and often work on business ideas that have yet to be established on the market.

For this reason, investments in startups are considered to be venture capital. Getting involved as a crowd investor during the early stages also offers the chance to participate in the later revenue or sale of the startup and thus achieve great returns. In order for your investments in the founder scene to be successful, we present you with 5 tips that experienced crowd investors apply in their own investment activities.

Assess risk capacity and risk tolerance

Equity-based crowdfunding is an investment that is associated with both great return opportunities and great risks. The question is whether or not the loss of provided capital is bearable. In the worst case scenario, can one do without the invested money? A private investor should only engage in equity crowdfunding if this condition is met.

Since startup investments are venture capital for the founding scene, early crowd investors are compensated appropriately for their courage. Growth companies offer investors an annual fixed interest rate of up to 8% within the framework of a venture loan. While startups cannot offer a fixed interest rate that big, investors participate in later earnings and can count on a large return when the startup is sold, which is also called an exit.

In the end, every crowd investor has to decide for him or herself how much risk to tolerate. This question is tied to the respective investor type. The defensive and conservative crowd investor values security more than return. The moderate and risk-oriented crowd investor, on the other hand, is courageous and is willing to take bigger risks in order to gain prospectively higher returns.

We developed a questionnaire in our article “What Investor Type Are You?” which you can use to find where you are on the spectrum. This evaluation may serve as a basis for your investments. Whether you count among the conservative or the risky crowd investors is a personal assessment that is neither right nor wrong.

Spread portfolio risk

As a general rule, risk can be reduced by spreading or diversifying the invested capital among differing investments. This also goes for startups – capital should not go to one single startup entirely. Portfolio theory assumes that the sum is spread among multiple investments, in this case multiple startups.

If an investment is not successful, then other investments in successful startups are able to balance out this loss. For this to work, investors need to make sure they invest in companies from differing industries and with varying business ideas. When a crisis hits one branch, not all investments in the portfolio are affected to the same degree.

Gather experience

In equity crowdfunding, investments are not made alone – they are made together with a crowd. That is why the profile of each financing round on Companisto includes an investor forum, in which the crowd investors (which we call Companists) can engage in conversation amongst themselves or with the founding team. That way, open questions between the crowd and the founders can be cleared up in advance.

By carefully reading the questions asked by other investors and the startup's respective answers, you gain an even deeper insight and benefit from the knowledge of others. Through this exchange with the founders and the crowd, crowd investors themselves become part of the startup scene. Since you can become a crowd investor in startups without a minimum amount on our portal, it is possible to start investing with small sums. In this way, investors can find out for themselves which opportunity is suitable for them.

Read contracts and company profiles thoroughly

Companisto’s participation contracts are standardized. A few parameters change depending on the financing, since, as an example, the participation rate is dependent on the company valuation; generally, however, the contracts are the same. Taking the time to read through everything thoroughly once is worthwhile for new investors on Companisto. Should you have questions concerning participation, you can ask us directly.

Business ideas, team, and business plan are not the only factors that play a role in deciding which startup to invest in. The central questions include:

• Can the product successfully establish itself on the market?
• Is the capital need, as illustrated in the startup profile, reasonable?
• Is the monetizing strategy of the business idea understandable and plausible?

The last point indicates that the startups should at least know how they want to make money with their business ideas in the future. This point may seem too logical to have to be addressed. But it’s a factor, nonetheless.

Stay with it

Equity crowdfunding is a long-term investment. Participation in a startup (unlike venture loans for growth companies) generally runs for five to eight years – that’s almost a marriage! The companies send quarterly reports in which they inform the crowd investors about their current situation. These reports enable the investor to keep an eye on the development of the startup and thus on his or her own participation.

Experienced crowd investors go above and beyond in staying up to date. They follow not only the developments of their company; they also observe the founding scene as a whole in order to recognize new trends on time. That’s how they find innovative business ideas and possibly the right startup in which they can participate via equity crowdfunding early on.

Have we piqued your interest? Then register on Companisto today!