With this article, we intend to identify the peculiarities of the startups in front of traditional companies and we suggest some advice when investing in them.
It is clear that the global economy is being driven more and more by technological innovation. For this reason, startups today have a strong technological character, and investing in them has special considerations that are worth mentioning.
The difference between this type of business and the traditional one lies in scalability. Typically, technology companies have a much faster growth potential than traditional ones and can generate high returns for their investors. Investing in these types of companies, therefore, can be very beneficial, although it also involves risk since a percentage of these fail.
Here we share 6 tips on how to invest in startups and make money with it …
1) The team is more important than the idea: A great business idea without a good promoter team is worthless. On the contrary, a good team with a regular idea will be able to incorporate variations until finding a successful business model.
2) Look “beyond”: If you invest in a startup, you are investing in what the company can become tomorrow and not for what it is today. Google, Facebook, etc. Were small startups in its beginnings and today its value does not need to be mentioned … There is the mix between art and investor analysis to identify the best startups to invest and achieve profitability.
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3) Have patience: We have to take into account that these companies often do not have sales, especially at the beginning, and for that reason they are difficult to analyze and we cannot be based on purely analytical methods. Also, when they start to have benefits they are usually reinvested to sustain growth.
The investor who invests in a startup financing round gets profitability when the subsequent rounds are launched and the company due to its growth has a market value much higher than the start.
4) Manage the risk: The intelligent investor manages the risk thoroughly and diversifies its investments. Assigning probabilities to different scenarios is a good way to get an idea of what we are talking about.
This assignment of probabilities must contemplate different scenarios. Probability that the startup in which I have invested: a) break, b) return the investment, c) generate a performance, d) grow exponentially and have extraordinary returns.
5) Determines the uncertainty: The investment we are talking about can be a lot of fun, and it means a higher return than the traditional investment in bonds, equities, etc. But also involves a great deal of uncertainty. Therefore, it is recommended to invest in startups with surplus resources and not with money that is needed in the short term.
6) You do not contribute only capital: We must bear in mind that the companies we have been talking about are in their initial phase, so the help as contacts, mentoring, feedback, etc. Can be the difference between success and failure of a project.