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5 Guidelines for First-Time Startup Investors

Jobs Act and Investing in StartupsThe startup investment landscape has recently undergone some significant changes. The SEC previously restricted investing in private deals almost exclusively to accredited investors, but the JOBS Act reduces the limitations of these private investments. Because of these reduced limitations, investors like you have access to startup investment opportunities through tools like equity crowdfunding platforms.

Private investments used to typically range from $25K to $250K, but today’s startup landscape allows you to invest in a startup for just a few thousand dollars. And because the general rule is to not invest more than 10% of your net worth, many investors are now able to help fund multiple startups without putting forth their entire nest egg. Equity crowdfunding platforms not only reduce the necessary amount to make private investments, but they also allow newcomers to navigate many different deals so they can find the best fit possible.

Make sure you are ready to invest in startups before taking the leap.

1. Have Startup Capital Ready

Putting in the time and effort to find a great investment opportunity will be all-for-not if your capital isn’t readily accessible. If you try to pull the trigger on an investment but have to spend time liquidating a CD or trying to get money out of your IRA, you’ll most likely watch a great opportunity pass you by. Whether you keep them waiting for your investment or back out at the last minute, a lack of planning on your end is a big inconvenience to the entrepreneurs counting on your support. Additionally, backing out at the last minute out can give you a bad reputation in the startup community.

2. Understand Startup Risk and Diversify

Because the majority of startups fail, a realistic approach to investing requires the realization that you might not get your investment back. Understanding factors like the industry and market of the startup you’re investing in helps you reduce this risk, so make sure to do your homework. If you’re still dealing with uncertainty while writing the check, it may not be the right time or opportunity for you.

Diversification is one of the most important aspects for any investor to keep in mind when managing risk. When you mitigate risk by investing in multiple startups, you allow the chance for one or a few startups to more than pay for the ones that fail. Known by some as “Spray and Pray”, this method involves investing in numerous deals early on and providing additional funding to those proving to be more successful later on.

3. Be Patient

Once you understand getting your investment back isn’t a guarantee, you must also realize it may take five or more years to happen. Liquidity events like public offerings and acquisitions by other companies are the most common ways to get paid back for your investment. However, these events can take up to 10 years to materialize. Make sure you’re ready for a significant time commitment before you make your investment.

If circumstances change or you realize you’re not as patient as you once thought, there are opportunities to sell off your shares. For example, Groupon raised almost $1 billion, some of which was to allow shareholder liquidity.

4. Understand the Exit Strategy

Whether it’s through a public offering, acquisition, or some other method, members of a startup should be able to share their exit strategy with potential investors. If they plan to get acquired, ask for a list of potential competitors that might realistically acquire them. If they plan to go IPO, they should be able to give a general time frame of when that might occur. If the startup seems to lack an exit strategy altogether, you should reconsider your investment.

5. Be a Mentor or Provide Connections

Your financial contribution isn’t the only way you can help a startup. A big part of angel investing is helping the companies you invest in by mentoring them or connecting them to additional people who can help them succeed. Just as you’re assessing a startup for investment, the startup is most likely looking at what you can offer in addition to capital.

Guidelines for First-Time Startup InvestorsHelping entrepreneurs achieve their dreams and build great companies is an exciting and rewarding process. As an investor, you not only have an opportunity to profit from your investment, but you are also able to share the journey with the entrepreneurs you support. With an abundance of smart, creative people waiting for your capital, it may be hard to pass up so many attractive investment opportunities.

By following these guidelines and knowing how much time and capital you have available, you’ll be able to invest in the right number of these companies to benefit your portfolio and the entrepreneurs as much as possible. We’ll help you get started.