Startup investing can be rewarding both financially and
personally. By investing in a startup you are contributing to job creation and
capital formation. The influence of entrepreneurs has shaped the U.S. since
before its founding and the contribution with such innovation its absolutely
immeasurable.
Even though picking winners is not an easy game, making a
home run by investing in startups means that the returns could yield between 5x
to 100 times returns on the initial investment. However, it is crucial to
conduct the appropriate due diligence on the business, market, competitive
landscape and founding members to mitigate against risk.
At the company I co-founded for instance, RockThePost, an
investment platform for startups, we help with the due diligence process by
only showcasing highly vetted startups. Each entrepreneur and their high level
officers have to pass through background checks in order to even be considered,
in addition to pitching the business venture to our investment committee, which
is comprised of four financial experts, and led by the former Chief Financial
Officer of E*Trade Financial, Robert Simmons.
Below are some of the most important tips when considering
making an investment in a startup company.
1) Invest in a domain you know. One of the best ways to
reduce risk is to understand the market that startup operates in. This will
provide you with a better sense when projecting the potential success of the
venture. Make sure that the business has a scalable model so that it can grow
to a level in which you will be able to get your money back as an investor.
2) Drill into the track record of the founders. The people
behind the company are the most critical factor, especially for early stage
companies. This is mainly due to the fact that products need to be iterated
several times until they are able to find where they fit in the market. Just
like Jim Collins’ book “From Good To Great”, it is all about having the right
people sitting in the right seat. Eventually they will end up finding the right
direction. Here you want to focus on their background story (previous
companies, education, etc.) and what type of value they bring to the table.
