Entrepreneur’s guide: how to choose a startup to invest in
According to a study by the GetInvestor business platform, 90% of large Russian investor companies plan to intensify work with startups. Among the most popular areas: FinTech, Big Data, Machine Learning, B2B Software and blockchain.
These statistics show that smart investments in fresh ideas have a high chance of success. Today we will look at how to choose a startup for investment and increase your own capital.
What is a startup
In literal translation from English, “start up” means “start”, “start”. Therefore, many mistakenly equate startups with any new business projects. To understand the key difference between these terms, let’s turn to the definition from Wikipedia:
The words “with short operating activity” do not mean that the company will cease to exist in 3-4 years. The fact is that the main goal of a startup is to “probe” a new effective business model that will quickly bring good financial results.
When such a model is found, a large corporation is created on its basis – that is, a startup is reborn and goes to a higher level. But an ordinary small business enterprise develops according to a scheme that is ready and tested by many organizations and does not make powerful breakthroughs throughout its existence.
A few more distinctive features of a startup:
- based on innovative ideas;
- focused on the rapid implementation of the product;
- have a high risk of failure;
- develop with the help of modern technologies;
- if successful, they bring huge profits.
And one of the main differences is the lack of sufficient capital. Therefore, novice startups are always actively looking for venture investments. Who knows, maybe you will join the ranks of the lucky ones who raise decent money on fresh ideas.
Is it profitable to invest in a startup
So, you have the necessary amount, but you are not sure that investing in startups will turn out to be profitable … Such fears are quite justified. According to statistics , 90% of startups fail.
However, if successful, the return on investment in a start-up is much higher than the return on investment in established companies.
The following recommendations will help you avoid a fiasco on the financial front:
- Take a course on import substitution. After February 2022, the Russian market is experiencing a shortage of many Western technologies. Today is the time to find a startup that relies on the development of scarce areas. For example, cloud services, information security solutions, ERP, chips for transport cards or components for cars.
- Don’t invest in products you can do without. According to experts , the already low incomes of the Russian population will continue to fall in 2023. Accordingly, spending on entertainment, healthy lifestyle, self-improvement and other optional areas will decrease.
- Study the business plan. Investing money blindly is a bad idea. Ask a startup for a detailed business plan containing financial indicators, analysis of the target audience, product features. To be on the safe side, do your own market research.
- Attract experienced professionals to the business. The role of the investor is often not limited to simple financing. If possible, raise the issue of strengthening the team with top-notch specialists who, for known reasons, remained unemployed in 2022. First of all – IT specialists, marketers, financiers.
Also, to reduce possible risks, do not put all your eggs in one basket. Keep looking for startups until you pick up at least 3-4 suitable projects, and evenly distribute capital among them.
Stages of development of a successful startup
A startup, like other organizations, goes through a series of successive stages of development. Moreover, an investor may be required at any stage. Keep in mind that investing in a business at the beginning is much more risky, but if successful, it is more profitable.
Key stages of startup development:
- Presowing. The startup has an idea, but so far there is no clear understanding of how to promote it.
- Sowing. The founders research the market and competitors, prepare a business plan, pitch deck, think over the directions of an advertising campaign. It is at this stage that the involvement of investors is most often required.
- Valley of death. Entrepreneurs create and test a demo of a product or technology. This stage has such a name because about 50% of startups do not experience it. This happens for a number of reasons: due to the lack of a clear development strategy, disagreements in the team, incompetence of the involved specialists, etc.
- Launch. The company prepares a release and presents the project to the target audience. The main resources go to marketing, product improvement and team strengthening. At this stage, additional investment is often required.
- Scaling. Here, startups are working to strengthen the position of the company, redistribute the budget, attract new employees, and develop the foundations of a corporate culture.
- Maturity – the stage of maturity. A startup acquires the status of a successful company. Now its owners can breathe a little and enjoy the results.
It should be noted that investments in start-ups are also attracted in stages. The required amount is “split” into several rounds. This helps to minimize risks and adjust the business plan in a timely manner.
How to invest in startups: 5 strategies that work
There are several ways to invest in a promising business idea. Consider the 5 most effective strategies:
- Crowdinvesting. Its meaning lies in the joint financing of a startup by numerous sponsors in exchange for shares or a percentage of the profits. The company’s products often act as an additional reward. This type of investment is suitable for those who have small amounts.
- Private investment. A person invests personal money in promising projects in exchange for shares of newly minted companies. This method is suitable for experienced investors who know how to analyze the market, calculate risks, and know how to choose a startup for investment. You will also need to have an excellent understanding of the area that you plan to finance.
- Investing through venture funds. In terms of format, this method resembles crowdinvesting. Only the sponsor here does not manage his money on his own, but transfers the funds to a specialized fund, the management of which decides where it is more profitable to invest them.
- Investing through brokers. Works on the principle of stock exchanges. Brokers act as intermediaries between startups and sponsors. They check potential participants in transactions for reliability and, for a certain fee, “reduce” the interested parties to each other.
- Joining an investment club. In such organizations, partnerships reign. All risks, profits and liability are distributed in proportion to the amount of money invested.
Of course, there are other ways to invest. For example, creating your own venture fund or business incubator. Only such experiments will require tens of millions of dollars, because at the initial stages it will be necessary to spend money not only on investment, but also on office rent, purchase of office equipment and employee salaries.
Where to find a startup to invest
Often, novice investors are faced with the following situation: there is money, the method of investing it is determined, but it is not known which project to use it to promote. To make your choice easier, let’s look at how to find a startup to invest in. Today, there are a number of specialized online resources for this.
Examples of platforms where startups and potential sponsors meet:
- City of Money . A crowdfunding platform where you can invest in small and medium-sized businesses. The amount of starting capital is 10,000 ₽.
- Napartner . Startup Market. Here are hundreds of business ideas from a variety of fields. Each project is accompanied by a detailed description (with terms of cooperation).
- SberUnity . One of the largest venture platforms in Russia. A nice feature is the Import Substitution section, which includes startups that are ready to offer technologies similar to foreign ones.
- Rounds . An investment platform where you can buy shares of promising Russian companies. The minimum investment amount is 50,000 ₽. Before being placed on the site, startups provide an audit opinion on financial statements.
- start2up . A platform that accumulates hundreds of startups with a detailed description. For convenience, all projects are divided into business areas and regions.
- Simex . This platform is perfect for beginner investors. Here you can invest only $5-10 in your favorite projects. Investment is carried out in one click.
- SZTsTT . The advantage of this site is that only innovative projects based on nanotechnology are posted here.
- GetInvestor . The resource catalog contains cards of dozens of startups that are in search of investments. All projects are divided into categories and stages of development.
You can also find a lot of cool startups offline. To do this, attend thematic events, such as economic forums, business seminars and conferences, investment exhibitions. They meet not only experienced entrepreneurs, but also beginners who are ready to offer fresh ideas for business.
How to choose a startup
On the sites discussed above, you will find hundreds, if not thousands, of projects. But on which one to stop is a difficult question. Eyes run wide, and all ideas seem cool. Consider how to choose a startup for investment.
The following recommendations will help you not only save your invested money, but also increase your capital:
- Give preference to popular destinations. For example, IT solutions, e-commerce, green technologies or EdTech.
- Analyze the benefit of the project. Sometimes a dummy is hidden behind a beautiful wrapper. Think about how the product meets the needs of the target audience.
- Pay attention to the team. As practice shows, start-up amateurs who have nothing but an idea behind their souls are quickly “blown away”. See if the owners have relevant experience, if a business plan has been developed, if they are attracting new specialists to the team.
- Analyze the market. Find out how much similar products are in demand today and at what pace the demand for them will grow. Look at the work of competitors and try to understand where their new company excels.
- Study the startup financial plan. This will help you estimate the amount of initial costs, as well as understand whether additional investments are required, and at what stage the product will begin to make a profit.
If the startup has passed the test on all counts, you can invest. If you have the slightest doubt, consider another option. Today, many promising companies are entering the market, so there is plenty to choose from.
With the right approach, investing in a startup brings huge profits. However, do not forget that even a carefully thought out and calculated business model a hundred times does not guarantee success. The development of a young company is influenced by many factors – changes in market conditions, the emergence of competitors, financial crises.
To minimize investment risks, take note of a few simple rules:
- Do not invest borrowed and last money.
- Formulate clear requirements for startups.
- Invest only in areas of business that you understand.
- Make informed decisions, but don’t think too long.
- Make investments in business legally.
- Diversify your investment portfolio – invest in several startups at once.
- Be patient.
- Plan your exit strategy ahead of time.