Whether you’re just kicking off your career as a venture capitalist or starting out in angel investing after making your money in other businesses, investing in startups can be a very lucrative activity. In fact, data has shown that well-positioned angel portfolios can return 2.5X over a 4-year period. Returns like these easily trounce stock market returns (and historical returns of most other asset classes).
However, investing in startups can be tricky… So what are the best practices in startup investing? To avoid the pitfalls and accelerate up the learning curve, here are eight steps to getting familiar with startup investing:
Be Ready to Make a Financial Commitment to the Role.
Investors are not paid until they make a profit on their investment. This is a key point for entrepreneurs to understand, as it will help them make decisions about whether or not to accept an investor’s offer. The same goes for employees: if you’re offered a job with an employer, and they want to pay you in stock options instead of cash, don’t assume that this means they’ll let the value of those shares rise while they hold onto them—instead, assume that they’ve already invested enough in your skillset so that any appreciation would be reflected immediately upon vesting.
Develop a Good Understanding of Different Types of Investments.
When you’re looking for a startup, there are many different types of investments you can make. Here are some examples:
An equity investment is when someone puts money into your company and gets shares in return. If you want to take out more equity later on down the road, this might be a good option for you.
A convertible loan allows startups to raise money from investors by selling them convertible notes that convert into stock at a later date (usually when the company has grown). Because these loans have an early stage risk attached, they tend not to pay much interest but offer better liquidity than traditional bank loans do—and even if things don’t work out as planned during the term of their contract (which usually lasts 12 months), there will always be options available for refinancing or repurchasing existing stock without having had any drama first!
Learn the Basics of Startup Funding Processes and Protocols.
As a startup investor, you need to know the basics of startup funding processes and protocols. This will help you avoid common mistakes in terms of raising capital that can cost you money and time.
The first step is learning how to raise money from investors. There are three main ways to do this:
Angel investing – This is when an individual invests his/her own money into a company or project with the hope of earning an ROI (return on investment). The investor does not get any equity in return for his/her investment but instead receives perks like board membership or access to early-stage technology.
Seed rounds – These are small investments made by angel investors who have previously invested in startups or have experience working within them as well as contacts within their network who may be interested in making larger investments later down the road if things go well with your company’s growth trajectory
Seek Out Mentors That Can Help Guide You Through the Process.
As a startup investor, you will not only be navigating the startup ecosystem but also the financial side of it. You will learn about how to invest in startups and what kind of companies are stable enough to invest in.
You should seek out mentors who can help guide you through this process because they have been through the process before and know where they are heading with their own companies or projects. Mentors can also provide valuable advice on how to navigate each stage of funding a venture capital firm (or any business).
Mentors will have insight into legal issues as well as people skills that might help make your relationship stronger with other investors or potential clients/customers in your portfolio company’s market space.
Network, Network, Network (And Then Network Some More).
One of the best ways to get introduced to people who are interested in your company is by meeting them through other people. This can be done at conferences, meetups or social media.
When you meet someone new, ask how they heard about startups and what they’re doing with them. You might also want to ask if there’s anything else you can do for them—it’s always nice when someone asks!
Understand What It Means to Work With Money vs Work With People.
Understanding what it means to work with money vs work with people is the first step to understanding your role as an investor.
Money is easy to understand, and you can usually explain its value in terms of dollars and cents. People, on the other hand? Not so much. Money isn’t a motivation for most people—and it shouldn’t be for you either! People are motivated by their passions and beliefs—and those things don’t always align perfectly with cold hard cash!
A great way to think about this distinction: imagine if someone asked you why they should hire your business over another one because it was cheaper or had better reviews than theirs? Would that person be able to tell them exactly why they wanted their services again now? Probably not yet; but when given time, perhaps after some coaching sessions or feedback from others within the company itself (like potential customers), then yes–they would likely have something useful at least partially clear about what makes them choose one company over another based solely on cost/price point alone…
Develop Your Interest in Startups, Investors, and Entrepreneurship Early On.
The key to becoming a successful venture capitalist is understanding the importance of startups and the entrepreneurs who are creating them. Startups are an important part of the economy, as they help drive innovation, create jobs and spur economic growth. However, they are also incredibly important for our future as well—they’re one way that we can make sure our world continues to evolve in positive ways!
Startup investing is an opportunity where you can make money while helping entrepreneurs grow their businesses into thriving companies that will continue on after you’ve moved on from your investment fund. In return for your support (and hopefully profit), these entrepreneurs will give back by sharing their knowledge with others about how best practices work within their industries so others may benefit from those same strategies when launching new ventures themselves later down the road after realizing what worked well during this particular startup phase has been successfully replicated again later down line…
Most Importantly, Don’t Give Up.
The most important thing you can do is not give up. As much as we all want to quit and be done with our startup, the reality is that most startups will fail at some point in their lifecycle, even if they are successful at first. It’s important for investors who invest in startups to remember this when making decisions about which companies to fund and what stage of growth they want to fund them at.
As an investor myself (and one who has watched friends’ investments go bust), I realize how hard it can be for an entrepreneur whose company is failing or facing other challenges like business model changes or lack of funding—even if there are still many reasons why things could improve over time! So don’t give up! Your dream may not come true today; but tomorrow? Or next year? You just never know until you try again…
VC investments are all about the money…and people.
Venture capital is a form of private equity, but with a focus on high growth companies. Private equity investors are typically interested in large stakes in companies and expect to earn returns from their investments over time. Venture capitalists, on the other hand, want to provide funding for early-stage startups so that they can grow beyond expectations and become profitable later on down the line.
In order for venture capital investors to make money off these investments (and earn those returns), they need something from you: cash upfront or additional shares after your company has been acquired by them (or another company). This often requires that you raise money from other sources such as banks or angel investors before approaching VCs about investing in your business plan—but it’s worth it since there are some pretty sweet perks!