Investment Strategies at an early stage of a startup company
In the last few years, startups have made old industries on their toes, solved several challenges with just a click of a button. Startups have managed to cash in a lot on their products and services, especially if they prosper well. Startups mainly focus on developing their products, customer building, and establishing significant cash flows. Many investors consider the startup phase of a company to be the riskiest stage of a business. If the company is not sure how to carry out certain activities, it might fail to deliver the best products or services.
A startup is a newly established private company, probably between5-10 years old, and is designed to scale high quickly. Most startups start as minimal operations while developing their initial initiative while seeking additional funding. Startups can venture on capitalists or angel investors as sources of financing as they continue building their business.
For a startup company to run smoothly there should be a constant flow of capital. Throughout a company’s lifetime, they are engagements of multiple rounds of investments that help it grow to a profitable and thriving business.
Your investment strategies are like your own game plan
It is of importance to find one that suits your objectives as well as your portfolio. The startup ideas of a 25-year-old person are much different from those 65 years old. The first kickoff investment enables the business idea to be translated into a tangible product or service. In most cases, the funds can be boosted from the investor’s own pockets, and if lack pops up, they can get it from government or institutional grants.
Some studies show that 80% of investments fail due to the high mortality rate of startups. This is in the sense that they do not generate enough profits for the patterns involved. This is why you will find that investors, either business angles or significant funds diversify their risk levels by supporting several companies, hoping that few of them will yield enough profits to compensate the ones which have failed.
Three considerations to take into account on early startups:
Amount: It is vital to make several small investments for the strategy to run smoothly. If any of the previous investments are successful, there will be enough money to invest in the future rounds.
Profitability: For any investment strategy to work on a startup, 20% of the investments should yield profits and compensate for the failed ones. This will ensure that the investor’s funding does not run at a loss. This means that the 20% must be very profitable.
Time: The majority of investors back up startups to get returns as soon as possible, but this period is not usually short as it may take up to 3 to 4 years.
Investors need to focus on their investment strategies by valuing more or less the above considerations.
To invest means to manage risks.
No investment comes without risks, especially startup companies. Investing properly does not imply everything will run accordingly. It involves taking many risks, which is why most investors invest more to increase the value.
The first way to manage risk is by assessing the value of the startup. Higher valuations are equivalent to more risks associated; thus, it needs more investments to increase the value. Ways of managing risk associated with investment valuation include:
Liquidation preference: This implies that whenever there is an exit of liquidation in the company, investors have the right to get X times their original investment before any other person in the company receives it.
Anti-dilution: In this case, when there is a later round, the startup’s pre-money valuation cannot be lower than the initial round’s post-money valuation.
Vesting: There should be an agreement indicating that the founding team f the company should stay for certain duration of years to receive a certain number of shares.
Lock-up: It helps create limits that stop founders from selling or leaving the company before a certain period elapses.
Selection and Valuation
Controlling risk is part and parcel of every investor trying to invest in a startup company. This is a process that involves performing a thorough evaluation of the startup before putting in the funds. Investors need to carry out a series of internal and external factors that might adversely influence the future of a company.
Below are some of the examples,
Team: Founders and early employees co-exist peacefully with each other and are fully committed to the project.
Market: If an investor or fonder wants a company to grow within a short period rapidly, there should be a big market and real clients willing to buy the products or services sold by the company. What is more important, the target market needs to be adversely growing.
A startup is investable: This implies that the startup should have a high growth projection and a possible acquisition outcome.
Business Model: This implies that the business model should be highly scaled ad profitable.
Projections: When investors are considering investing in a particular company, they want to know what plans will enable the business to grow over the coming years. They also want to know whether the value will generate enough profits within a certain period.
Competitors: It is often said if there is no competition, there is no market. Investors want startup companies to understand the competition involved in the market.
Attraction: Most investors only invest only in startup companies that have specific market attractions.
Investment Strategies Conclusion
The startup investments landscape is currently moving in a different direction whereby introducing new things.
Individual Investors now can access unprecedented startup investment prospects that were only available to the selected few investors in the past. All of the above strategies vary from one company to another. Some certain aspects apply to more mature companies.
One of the significant ways of reducing investment risks, especially a startup, is through syndicated organization co-investments.
This is where a top business angel with a high number of startup record investments leads rounds, and then other co-investors can back up.
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