According to the Small Business Administration, around 500,000 new businesses are started every year in the United States. Many of these new companies can find it difficult to obtain financial resources. If you are financially able to invest in a startup, tread carefully, but once you do invest it can be rewarding both financially and personally. You can contribute to job creation and stimulate the economy. Investing isn’t easy and it doesn’t always work out in your favor. However, at the same time, it could also yield between five to one-hundred times returns on your initial investment. Before you invest though, you must do your research! Make sure that you follow these six tips before investing any money.
Invest in something that you know, understand, and love
One of the best ways to ensure that your investment is as safe as possible is understanding the company and market that you are investing in. Having a stake in a company is a big deal. It’s important that you care about where you money is going and trust in the company and industry. If you don’t believe that the company will succeed then why are you even thinking of investing in them?
Learn about the company’s history (especially the history of its founders)
The people running the company are the ones who are going to make it succeed, especially during the early stages. Important things to know about the founders are: why are they interested in this market, what education do they have, what is their previous experience, and what value do they bring to the table? Additionally, it’s important that you just generally like the people that you are investing in. You need to trust their judgement and like their personalities to ensure that you will work well together.
It is also important to research what the company has already done. What is their business model? How have they used their funds? What are their goals? Looking at the way the company is run and understanding where they want to take the company are imperative things to know before making an investment.
Invest in multiple companies
Instead of investing in just one company you should cast a wide net. While doing so will increase your initial investments, in the long run it will raise your chances of return on your investments. Getting money back from an investment takes time, so you need to be patient with your investments.
Use Social Media
If you can’t figure out what you should invest in there are many websites, such as AngelList, and apps that can help you. Checking out different companies on social media before investing is a great idea, especially if you are new to the investing game. However, it’s important to remember that you need to do more research than just what you find on the website/app before you invest!
Do your research
Make sure that you understand the path that the company is taking. How do they expect to make a profit? You will never get a return on your investment if the company isn’t charging for its service at a reasonable price and there is no point in investing in a company that can’t financially sustain itself. It’s almost impossible to know exactly where the company will be financially in five years, but it is possible to review the burn rate of the company, intended salaries and see if they are spending their funds in an appropriate way at the moment. As an investor you need to understand what, why, and how the company intends to spend its money.
In addition to researching finances it is also important to review the legal documents of both the company and of your investment agreement. According to Forbes.com you should “look at the articles of incorporation, by-laws if available, investor agreement, subscritpion agreement, terms sheet, etc…” Moreover, understand the deal that you are making with the company. How much are you investing, what percentage of ownership of the company are your receiving in return for your investment? Make sure you know exactly what deal you are getting yourself into before you sign anything!!
Know that returns on investments can take time
As I said before, it takes time for a company to grow enough to be able to give you your money back. You may not see returns for years. Be patient. After doing all of your research, you should be confident in a company and have faith that they will succeed so give them time to do so.