Investing in early-stage startups used to be only for the very rich and well connected. All that has changed after the JOBS Act, which caused the US SEC to ease its regulations on startup investing. Many exciting, innovative startups now accept investments from anyone. You don’t have to risk a big amount of money – the minimum investment in many of these startups is no more than several hundred USD, sometimes only $100.
But before considering any such investment, it is worth considering the benefits as well as the risks involved. First, let’s look at some of the reasons investing in early-stage startups can be so beneficial. Next, we’ll consider some of the challenges and risks. Finally, we will discuss the ways in which anyone can improve their ability to find promising startups to invest in, and our own method to screen startups efficiently.
The Unique Benefits of Investing in Early-Stage Startups
The rich and well connected have been doing angel investing for years, and the reasons for it are not just the potential outsized returns. Startups are exciting, innovative, and inspiring by their very nature. Angel investing can and should be interesting and enjoyable.
By investing in an early-stage startup you:
- Effectively join in on the startup’s journey, and take part in their excitement and vision.
- Support causes that you care for and make an impact.
- Gain insight into the future of technology and the economy by delving into the latest innovations and trends.
- Diversify your investment portfolio.
- Gain a chance to win huge returns on your investment.
The chance to receive disproportionately large returns on investment is what makes Angel investing in startups so exceptional. Angel investing is very risky, unpredictable, and mostly illiquid – but the returns can be accordingly high. The best startups give patient investors amazing returns, in multiples of hundreds and even thousands. Most tech giants that are worth billions today were once startups and turned those that invested in them in their early days into very wealthy people.
The Truth About Finding the Next Unicorn to Invest In
So how can one identify which startup will be the next Google, or Facebook or Tesla? There are many startups out there. Many of them will fail and only a very few will bring their investors huge returns. How can one pick out the winning startups early on? How to know who will be the next “unicorn”, or billion-dollar startup?
Here’s the truth: Nobody can know for sure. There are simply too many factors and variables that determine the success of a startup to make credible predictions with certainty. Even after spending a lot of resources on research and due-diligence, many professional venture capital funds end up with low success rates. The few professional investors that have consistent success in identifying winning startups early on, only share the investment opportunities they identify with very few, high-end investors. They also always have “skin in the game”, meaning that they themselves invest in the startups they believe in.
Warning: Be very cautious before trusting your money with anyone claiming they can tell you which startup will turn into the next billion-dollar unicorn, especially if they are asking you to pay them in advance for that information. Never let yourself be fooled by get-rich-quick scams. Instead, be realistic in your expectations, educate yourself, and make sure you understand the risks involved. We recommend that you diversify your portfolio to reduce your risk and that you always consult a professional investment advisor that knows your personal financial situation.
The Keys to Success in Investments in Early-Stage Startups
For most investors in early-stage startups, it would be realistic to acknowledge that accurately predicting which startup will make the whole way from a team of 3-4 people to a billion-dollar worth company is very hard to do. But even investors without any prior experience with startups or angel investing can improve their chances of success with the right strategy and with a methodical approach.
The idea is simple and definitely achievable – narrow down your options and focus your selection process to find the startups that have a higher chance to succeed. With a few basic principals, you can steer away from poorly managed or completely unproven startups. You can find the startups that show ability and strength early on, by checking on their proven achievements. After you’ve done your initial screening, look deeper into the ones that pass. Then you can further improve your odds by diversifying – spread your available investment capital across several startups, in smaller amounts.
The Five Startup Strength Indicators
While we do not claim to know who will be the next Google or Tesla, at CrowdFunding.Guide we believe that there are some clues that can help in identifying who are the better startups early on, and in screening out the ones that are less prone to success. We do that by looking for The Five Startup Strength Indicators. These are the key achievements and strengths that we expect to find in the best startups early on:
- Successful founder(s).
- Notable investors.
- Proprietary IP / patents.
- Notable customers or partners.
- Revenues and sales.
The Five Startup Success Indicators are simple, factual, and easily detectable characteristics of startups that can serve as a validation to the startups’ quality and potential, and indicate the possibility of long-term success. We believe that investors should see a minimum of at least two impressive Strength Indicators in a startup in equity crowdfunding, before even considering investing in it.
To be clear, The Five Startup Strength Indicators are a method for screening and narrowing down your search for investible startups. It shouldn’t stop there. Once a startup qualifies with at least one or two impressive achievements out of the Five Startup Success Indicators, there should be a further level of inspection, learning, and due diligence conducted before deciding to invest.
Summary and Key Takeaways:
Angel investing is no longer an investment class reserved for the wealthy and affluent – virtually anyone can now invest through equity crowdfunding.
Investing in early-stage startups can and should be enjoyable, and the benefits are well beyond the mere financials.
Nevertheless, the main appeal of angel investing is potentially outsized returns.
Investing in each individual startup is very risky. There are many startups, and most of them fail.
Identifying future unicorns is very difficult to do, but you can and should improve your chances of success by being methodical.
The keys to successful investing in early-stage startups are:
1. Use objective criteria to screen startup quickly and efficiently, to narrow down your selection and focus your efforts and attention.
2. Diversify your investments in several startups to increase your chances of choosing a winner.
The Five Startup Success Indicators are our set of screening criteria for early-stage startups.
If a startup passes the initial screening by demonstrating ample achievements in at least two of the Five Startup Strength Indicators, a deeper level of inspection and due diligence should take place, before deciding on making an investment.