For those looking to get into startup investing for the very first time, it can be difficult to know where to begin. Startup investing is exciting, which can make it easy to get ahead of yourself before you’re really ready to start investing. To make sure you’re ready and you know what to expect as a startup investor, here are our top tips and things to know before you take the plunge on that first investment.
1. Know your risk tolerance and time horizon
An investor’s “risk profile” is made up of their risk tolerance and time horizon. These two components should guide every investment you make.
- Risk tolerance describes an investor’s attitude toward risk. Startup investments are considered an alternative asset, and carry a high likelihood of failure, making them very risky investments. Traditional asset classes, such as blue-chip stocks or government and high-quality corporate bonds, carry relatively less risk. Before investing in a startup, consider whether or not you can afford to lose that investment entirely. If you can’t, that investment is too risky.
- Time horizon is the amount of time an investor expects to hold an investment before selling their securities. Startup investments have a long time horizon and are illiquid; they may never generate returns, and in some cases, cannot be sold. Investors hoping to make a return on their investment within a few years should avoid early-stage startup investments.
2. Learn the lingo
If you’re new to the venture capital world, there are likely many terms you’re unfamiliar with, and that’s okay! If you’re not sure what a cap table is or how a convertible note works, we’ve put together a glossary of commonly used terms that can get you on your way to speaking VC in no time.
3. Do your homework
MicroVentures conducts thorough due diligence on each startup we list on our platform. If you’re considering an investment opportunity on our platform, we highly encourage reading the offering documents in their entirety before making an investment. If you’re still left with questions after reading the offering documentation, don’t hesitate to do your own research or ask a question in our Investor Q&A or Discussion sections.
4. Understand the deal terms
Don’t fly blind. Always, always make sure you understand the terms of a potential investment. Familiarize yourself with the security type, any conversion provisions, conversion price, valuation cap, discount rate, etc., and how they could impact your potential return on investment.
5. Consider the exit strategy options
Not all startups will exit, but all startups should have an exit strategy in mind, whether that be through a merger, acquisition, or going public. A team that has thought this out should be able to provide investors with a few different realistic scenarios, although it’s important to remember that nothing can be guaranteed.
6. Have your funds ready
When you finally find an investment opportunity you’re ready to pull the trigger on, the last thing you want is to be scrambling to get your capital together and possibly miss your opportunity to invest. Plan ahead to have your capital ready when you need it.
7. Diversify with multiple, varied investments
We say it often, but it bears repeating: startup investing is risky. One way to help manage this risk is by avoiding putting all your eggs in one basket and investing in multiple startups. Ideally, some of these investments will generate returns that outweigh the ones that ultimately fail. One of the biggest advantages of using a platform like MicroVentures is that it’s easy to make small investments across multiple opportunities, making this kind of diversification a breeze.
The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.