Despite what they tell you in the media, most successful investors are not overnight sensations. A successful startup investor puts in the time, does the necessary due diligence, and learns the ins and outs of the relevant industries in which he or she is investing. In fact, the most successful startup investors cultivate an investment personality with patience at the forefront.
Whether you are a first-time startup investor, or have had a few wins and startup failures in the investment space, it’s important to remember that being a successful investor is a marathon, not a sprint. It is a journey.
Make no mistake, investing is not easy. There is no “one-size-fits-all” playbook. I personally have experience on both sides of the table, as a founder of a massively successful startup (as well as a few that didn’t yield great results) and as an investor in other startups. To help you think through some important considerations, here are a few of my top startup investment considerations to invest wisely for greater success.
Always Diversify Your Startup Investment Portfolio
Have you ever heard of the saying, “Don’t put all your eggs in one basket?” I learned this universal truth the hard way early on in my career, and it is now such an important aspect of my own personal investment strategy that the word “diversified” is included in the name of one of my investment companies. This serves as a constant reminder to keep this concept front and center as I consider various investment opportunities. You may think diversification applies to a traditional investment portfolio, but it also applies heavily to your startup investment strategy as well.
A strong startup investment strategy that nets the most returns commonly involves a subset of investments due to the wider distribution of your investments. For instance, the more you diversify across multiple startups, the more likely you will realize a big return on one, thus offsetting the losses from others.
Although there is no certainty in this strategy, data shows that diversification leads to better returns on average when compared to startup investment strategies that buck the “don’t put all your eggs in one basket” principle.
You Can Trust Your Gut, But Always Back It Up With Facts And Data
It is also important to do your due diligence prior to investing, because if you choose multiple bad startups, there will be no returns. Going with your gut when it comes to startup investment strategies can be very fruitful. I have had some exceptional investments turn out quite profitable by trusting my gut. However, I didn’t write a single check until I had the facts and data to back up my gut feeling.
Trusting those gut instincts, but holding off until all the facts are in, can be a pretty significant challenge for startup investors, especially those new to the game, but it is a very important startup investment strategy to adhere to. Get all the facts and data before investing.
What does this mean exactly? Here are a few key factors to look into before investing in a startup:
- Strong market opportunity. The market opportunity should be evaluated in both quantitative and qualitative terms. The facts and data include market demographics, market size, buyer personas, market need for the proposed solution, and more. You also need to look at future market opportunities, because you want to ensure growth is on the table.
- Startup team’s ability to execute. As you meet with the founders or leaders, you need to ask yourself, “Can they do it?” Do these individuals have what it takes to take this idea forward. This is essential to getting returns on your investment. The startup team needs to have a strong and well-defined purpose. This includes the proper composition of personnel, such as chief executive officers, dedicated managers, and departments with a dedicated workforce.
- Money management track record. Before writing a check to any startup, you will, of course, need to ensure the financial solidity of the company. And how you assess this is dependent upon the stage of the company. If you are looking to invest in an early stage venture, you should focus more on their projections to see how realistic or conservative they are. If you are considering an investment in a later stage company, you will want to make sure that someone is overseeingthe company’s finances. If they don’t have another professional firm involved,ask the executive team to show you a year or two of money in and (most importantly) money out. This will give you a good sense of how the startup will manage the money you invest.. It doesn’t matter if your due diligence seems intrusive; trust me, it’s necessary. You want to ensure that your investment is in good hands, and money will not be wasted.
There may be other facts and data you will want to examine before investing in a startup, like product analyses, target audience research, or other relevant data. Remember, it is your money, and if a startup fails to meet your specific requirements, it is probably best to move on to the next opportunity.
It’s Essential To Balance Risk With Steady Growth
Just as small businesses need to balance risk with steady growth, successful startup investment strategies is in many ways about balancing investment risk with steady investment growth. To do this, you first need to reflect on your risk tolerance as an investor. There are different types of investors, and your particular leanings will guide your startup investment strategies. For example, a very conservative investor should not be interested in startups at all, because startup investing is inherently risky. If you are interested in this segment, you should have discretionary resources to invest. It should go without saying that if you only have $100K to invest, you should not be investing in startups at all! It’s just too risky. The return on a successful startup can make it very attractive, but be sure that you understand the percentage of failures in your desired vertical so that you go into your startup investing adventure with eyes wide open.
To increase your chances of success, it’s best to take a balanced risk tolerance approach. Can you still be somewhat aggressive? Absolutely. But to cultivate steady growth, you should be aggressive only on one or two startup investments while maintaining a balanced risk tolerance on the others.
Are You Ready To Become A Successful Startup Investor?
As you move forward with your investment strategies, you will confront challenges. There will be failures as well as successes. Hone your skills, do your research, and stay balanced. Investing in anything comes with risk and to truly become successful, you need to do your homework. This holds true whether investing in stocks or startups in any industry. But with a few key startup investment strategies to ensure success in your investor toolkit, you can gain an advantage. From diversification to balancing risk with steady growth, the above are just a few of my top investment strategies for success.
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