What To Consider Before Investing In A Startup

What To Consider Before Investing In A Startup
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With startups popping up all over the place, there is no shortage of investment opportunities. However, how do you know it’s a smart investment, and what company should you choose? Investing can be a highly rewarding experience, both personally and financially, but it can also be stressful to put your faith in a new or small company. There is little to no guarantee that any startup will end up being a winner, but if it is and if you were there from the beginning, your investment could easily be worth more than one hundred times the amount you started with. It’s always a little bit of a gamble, but here are some tips that may help guide you while you consider investing in a startup.

Keep Diversifying

Of course, you do not want to put all your eggs in one basket. Multiple investments are the best way to avoid all your money being lost to unforeseen circumstances and market fluctuations. Diversifying will greatly increase your chances of success as an investor and will help you reduce the overall risk. If you are an expert in one field and can’t see how investing in a new company could go wrong, invest away, but don’t be afraid to follow a hunch you may have elsewhere. The only way to win is to have multiple players in the game.

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Keep it Familiar

The stock market is not a totally random game. A little knowledge of the field goes a long way in understanding and reading between the lines. Invest in fields and markets with which you are familiar. This will reduce your risk by leaps and bounds and give you a leg up on the folks who are just jumping on financial bandwagons. The more you know, the safer you are. Knowledge is power when it comes to being able to project the success or failure of a new business. The more familiar you are with the industry, the better equipped you will be to analyze their business model and be able to forecast their financial path.


Heavily Review all Legal Documents

If you are considering becoming a major investor in a small business or startup, it is imperative to demand full transparency from the get-go. Sit down with your lawyer and financial advisor and go over the investor agreement and all the terms and articles of incorporation. This is also a good time to scrutinize how the company is structured and to pay extra close attention to what percentage of ownership you are entitled to for the amount of money you are spending. Ask to see the company’s legal records as well, and inquire if they have run into any difficulties in the past with lawsuits or any other legal histories.

Investing in a startup should be a rewarding experience, especially if the company is following a path you believe in. Startups have a lot of leeway to really make a difference in an industry and have the power to change the way we think about certain trades. Many global powerhouses and household names began as a handful of idealistic students or young entrepreneurs in a windowless office with the cheapest rent they could find. It is true that there is always inherent risk in investing in a startup, but without the faith of financial backers, these great ideas will never get past square one. As long as you follow your gut and do not invest more money than you can afford to lose, you should be able to comfortably take the plunge and become part of a dynamic business that interests you from the ground up.

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Ankur Shah is the founder of the Value Investing India Report, a leading independent, value oriented journal of the Indian financial markets. Ankur has more than eight years of equity research experience covering emerging markets, with a focus on India and South East Asia. He has worked as both a buy-side investment analyst for a global long/short equity hedge fund and a sell-side analyst for an emerging markets investment bank. Ankur is a graduate of Harvard Business School. You can learn more about his latest views on global markets at the Value Investing India Report. -- He can be emailed at [email protected]
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