Investing in startups is no longer the preserve of high net worth individuals with high investment capacity, thanks to the boom in crowdfunding over the past decade, as startups contribute to the economy at scale as well as generating returns for investors.
In a report published by the American "Forbes Advisor" website, writer Joe Groves said that there is a lot of information that one needs to know about investing in an emerging company, including the different options offered, and what must be considered before making an investment decision, indicating that there are 3 The main options for investors looking to invest in a start-up project are:
Crowdfunding:
This raises small amounts of money from a large number of individuals, often via social media or crowdfunding sites.
Venture Capital Fund:
A form of private equity, a venture capital company raises money from investors to invest in startups and small businesses.
Wealthy Investor:
Usually a person of great wealth, who invests directly in a startup either alone or with others.
The writer takes a detailed look at each of the mentioned investment options, saying:
Crowdfunding:
Crowdfunding sites allow a large number of investors to participate in a funding round, whereby investors receive a small share of the stock in return for investing their money.
What types of investments are available?
The writer says that there are two main types of investments that crowdfunding platforms offer:
Equity:
In this method, you are obligated to invest a fixed amount of money in a certain estimated value, provided that the company reaches its financing goal so that you can obtain shares in the company.
Convertible assets:
Used when a company wants access to short-term funding, often before a larger funding round, where investors buy convertible assets that are converted into discounted equity at a later time, usually in the next funding round.
How do you decide to invest in a startup company?
Author Kirsty Grant, chief investment officer at crowdfunding platform Seedrs, advises potential investors not to invest in something they don't understand, and urges them to invest in companies they believe in, and investors should do their own research when deciding to invest in a company. emerging, including answering the following questions:
What is the “added” value of the product or service?
Why would customers buy it without the alternatives?
What is the size of the market and its obstacles?
How easy is it for competitors to offer the same product or service?
What experience does the management team have?
Will you need more financing to expand your investment?
The writer added that since investments in startups are high risk, you should consider consulting an independent financial advisor before making an investment decision.
How to invest using crowdfunding platform?
The author notes that investors should take the following steps before considering investing in a startup via a crowdfunding platform:
Choose the platform you want to invest in:
You need to check that the platform is licensed and regulated by the Financial Supervisory Authority, and you should also check that there are initial or annual fees or fees on profits made when the final sale of your shares.
Review investment opportunities:
The platforms list the names of startups that are currently looking to invest along with the percentage of funds raised against their total goal, startups provide comprehensive information about their business plan, and investors can ask questions and request additional information.
Verification:
includes background checks of the company and directors, validation of presentation information, review of commercial contracts and litigation.
Review of the guarantees provided to shareholders:
Investors must verify their rights as shareholders, including voting rights on matters relating to company policy and rights to issue new shares.
Payment method for investment:
Depending on the platform, you can fund your account using a debit or credit card or by bank transfer, and if you fail to deposit your money before the campaign closes your investment will be cancelled.
End the process:
Once the campaign is closed and all legal due diligence and investment documents are completed, an electronic certificate will be sent to the investors.
Startups must reach their funding goal within a specified time frame, or the money will be returned to the investors, and if the company exceeds their funding goal they can choose to agree to "overrun the funding limit".
venture capital funds
The author explains that venture capital is a form of private equity investment in startups that have strong growth potential but are not yet profitable. These funds buy few stakes in startups and provide them with financial support and expertise.
However, one of the barriers to investing in venture capital funds is the minimum investment amount, which is usually over $10,000.
How do you invest in a venture capital fund?
According to the author, there are two main types of venture capital investment options, which are the investment in the credits of the institutional investment scheme, and the investment scheme in the small enterprises.
The writer shows that these two systems invest in early stage companies that have a trading history of between 2 and 7 years, where they collect money from investors, but investors own shares in the core companies, not in the fund itself, and investors can only invest in these funds in the first round From raising funds, funds set their target rate of return during fundraising, usually 2 to 3 times the initial investment over 5 to 8 years.
Investing in venture capital funds
The writer stated that these funds are listed on the stock exchange, which means that investors can buy shares during the initial fundraising or in the stock market once they are listed, and investors can also buy and sell shares directly on their trading platform, although it may be difficult to find For stock buyers, sales tend to be at a discount to the underlying NAV.
What are the benefits of investing in startup companies?
The author believes that investing in start-up companies can give investors the satisfaction of helping a new company thrive, as well as providing financial rewards such as:
Growth potential:
While
investing in startups presents high risks, there is also potential for higher returns.
According to Crowd Cube, investors made 19 times their initial stake when digital bank Revolt was valued at more than £1 billion in the latest investment round.
Similarly, early-stage investors in rival bank Monzo earned 15 times the return on their initial investment in the latest funding round.
Value-based investment:
investing in start-up companies provides an opportunity for investors who wish to support companies that align with their personal values.
Personal Bonds:
Many startups by investing support their friends and family who believe in their concept and ability to succeed.
Sense of accomplishment:
Some investors enjoy supporting entrepreneurs and witnessing their success first hand.
What are the problems with investing in startups?
The writer explains that investing in startups is not for everyone, especially investors who do not want to risk losing their money, for the following reasons:
High risk:
According to statistics, 10% of startups fail in the first year, and only 40% survive 4 years or more. Many startup investors will lose some or all of their money, and for every success story, it is preceded by a failed attempt. One way to reduce this risk is to distribute your investments to a number of startup companies, or invest in a venture capital fund.
Length of investment:
Even if the startup is successful, the money invested in the startup is likely to be restricted for at least 5 years, and possibly longer.
Valuation:
Every equity fundraising must be evaluated by a startup. Valuing a startup is very difficult, especially if it has not yet generated a profit, or even significant revenue, and the valuation expectations of founders can be overly optimistic, especially in terms of Expected earnings growth.
Lack of Income:
Unlike venture capital funds (VCTs), you are less likely to get income, such as dividends, from investing in startups.
Inability to sell your investment:
Stocks in startup companies are illiquid, and investors are unlikely to have the opportunity to sell their shares unless the company is sold, floated, or received further funding.
How much should you invest in startups?
The writer pointed out that investing in start-up companies is considered a high risk with the possibility of incurring losses, so it is recommended to invest small to medium-sized amounts in many companies.
The author shows that investing in a venture capital fund may also reduce the risk of failure for a startup by providing a diversified portfolio of companies.