Investing in Startups

Investing in startups is justified only in the case of projects that are doomed to commercial success. Such ideas are rapidly gaining popularity, customers, subscribers, fans and are able to multiply financial investments by hundreds of percent in an extremely short time.

In the vast majority of cases the main object in which funds are invested is not an idea that is good in itself, but people who can make a profitable candy out of this idea providing quick, clear and convenient solution to the problem of millions. As a rule, you will not be able to do without an impressive set of business qualities, self-confidence and true professionalism.

One of the safest ways, which is almost ideal for novice investors, is to invest money through investment funds. No less interesting options are considered to be investing through pools  which are formed at the expense of several private investors who want to buy a particular startup. Both of these approaches are good because they fairly balance the profits in case of success and smooth out the losses from possible failures.

Investing in startups through pools opens up the opportunity to invest not only financial but also some material resources. Sometimes influential businessmen or officials even train aspiring startups to make money on their projects later. Of course, in the case of such a thorough approach the investor gets the lion’s share of future profits.

Numerous exhibitions, competitions and conferences dedicated to startups and everything related to them are held in large numbers. Such events are often written about on thematic resources and in specialized publications. Within the framework of such meetings it is quite easy to determine the object of future investment since there is an opportunity to get to know and communicate with the creators of the project.

How is a startup better than a corporation?

Investing in startups that are destined for commercial success is a powerful boost for a super-profitable company at the beginning of its journey. Only due to the specifics, scale of the project and the work of a small team of enthusiasts everything is implemented much more creatively and faster. Formalities are minimal and the decision-making time is much shorter. Products are created in record time and the care of reputation is still put on the back burner. Numerous improvements are carried out in the process of implementing key ideas. The startup team is characterized by a high level of mobility. The founders work in a comfortable, free environment, where the development of creative activity flourishes.

THE SPECIFICS OF INVESTING IN WEB PROJECTS

Investing in startups of the web segment involves obtaining high incomes. For this reason, a well-thought-out resource monetization system automatically becomes a top priority. Without a working prototype or rather a working project that has already begun to show the first practical results, it is premature to raise the question of investing funds.

The main secret of investing in Internet startups is the correct choice of the implemented idea and further work with the project in the form of metered investment as the company expands and develops.

One of the fundamental points is the possibility of personal contact with the founder or several founders of the project. It is desirable to organize a joint study of the business plan, ideally, to involve experts in the process  with the help of which it will be possible to extract even more benefit from what is happening. Without the use of open channels of communication and productive partnership negotiations, the prospects for success become very, very vague.

HOW DO VENTURE CAPITALISTS INSURE THEIR INVESTMENTS IN STARTUPS?

People who have been working in the field of information technology and investing in such projects for a long time know the main rule of experienced business angels in the segment. The formula looks quite simple and is written as 30/40/30. This theorem is interpreted as follows:

• About 30% of the portfolio does not shoot at all.
• About 40% is accounted for by frankly weak projects.
• Another 30% show relatively good results.
• At the same time when the portfolio of 20-25 projects shoots about 3-4, the fund gets the right to be called successful.

Investing in startups-legal registration

No matter what anyone says  we do not yet have a separate law regulating relations in the startup segment, so we have to act according to generally accepted norms and rules. Below are the three most reliable ways to protect investments in startups.

Conclusion of an investment agreement.

The document allows you to describe in detail the goals for which funds are allocated, as well as to reveal the characteristics and parameters that the startup will need to focus on in the future. The investment contract involves the development of a system of reporting and control for a substantive conversation during periodic meetings with the investor, as well as to identify the final result for which everything was started, and most importantly – the timing of achieving this very result.

The loan agreement

This option is somewhat simpler since it only regulates the process of using the funds received. The advantage of the loan agreement is that it is possible to prescribe the procedure for actions in case of circumstances in which the period of return of funds invested in the startup will be reduced. The loan agreement also specifies the interest rate for the use of the invested funds and the conditions for changing this indicator.

Simple partnership agreement

The ideal option for those who want to invest with several partners at the same time while maintaining the same rights or specifying in the contract a certain order of use of such rights. This type of contract is also convenient because it allows you to work out the procedure for using common property, ways of communication between the founders, the procedure for allocating a share of each founder of the company as well as the procedure for terminating the contract and the scheme for paying compensation to individual project participants when leaving.

How much profit does investing in startups bring?

The largest number of successful exits was recorded after 18 months of investment operation. In the case of the investor’s exit from the project after 7.5 years, the financial indicators turned out to be no less attractive, but too long a waiting period clearly does not justify itself.

How and when to exit a startup?

With the real outputs of the start-ups things are very simple. A direct sale resolves any issues when the investor decides to leave the project and withdraw funds. Of course, if by this time there is something to implement.

The average sale  occurs 3-5 years after cooperation with the project. For such a period of time the company is more than possible not only to get stronger but also to demonstrate its own survival in the market as part of the development and implementation of the idea. Moreover, in a few years it is quite possible to return the venture funds invested in the project, not forgetting to add to them the proper share of profit.

The most popular ways to exit a startup around the world:

• Repurchase – sale of the investor’s share to the company’s management.
• Repurchase of shares by employees of the company or incoming managers.
• Direct sale to another investor.
• IPO-access to the stock exchange through a public offering.

Forced purchase of shares by the company’s management if the project cost was formed at a lower level in comparison with the planned indicators.

Forced exit, often due to the liquidation of the company – the most unfavorable scenario.

At first glance, investing in a startup may seem like a lottery, but it is partly true. However applying the years-old professional approach of Western investors, the chances of success increase significantly.