So, you’ve seen Shark Tank or Dragon’s Den and got a bit of an itch to try your hand at investing in a startup. Now what? With so many investment avenues available to you, it can be tempting to jump right in with both feet. Resist that impulse!
While not meaning to be a party pooper, I cannot exaggerate how important it is to understand this risky asset class and do your research before you invest. Fortunately, we’ve put together an ‘investing in startups’ guide to get you set on the right path – you can download How to start up investing in startups for free here.
In the meanwhile, here’s a simple overview of what you should consider before getting started.
1. Most startups fail
Up to 80% of businesses will ultimately go bust or not return you any money. There’s no formula to picking the right one, so unless you’ve got the spare cash to invest in a full portfolio, you may want to reconsider.
2. You’ll not get your money back for ten years
While the vast majority of pitch decks you’ll read will say they are looking for an exit in three to five years, research by angelblog.net shows that it’s more likely to be between eight and ten years before you see any return.
3. We all are susceptible to bias (except me)
Unfortunately, we all fall victim to a number of cognitive biases that make us think we’re more likely to make smart decisions, less likely to overlook a vital bit of information, and luckier than we are. These are all bad for investing and the smartest thing we can do is invest alongside others who cover our blind-spots and are informed in areas where we aren’t. Investing with others is key – if you don’t believe me, take serial angel investor Phil Wilkinson’s word for it.
4. Needles in a haystack
Not even one in a hundred startups gets funded by a venture capitalist or angel – after all, imagine how many pitches they need to go through to find the one that’s even worth investing in. Have you got the 20 hours it takes your average angel to review each opportunity that finds its way to you? Again, there is a benefit here to investing as a group, where due diligence efforts can be combined to weed out the unlikelies in less time.
So, now you’re a bit more familiar with the dangers, high failure rates, lengthy times to exit, the perils of cognitive bias and the sheer volume of due diligence you’ll need to do. Ask yourself, is this type of investment still right for you?
If the answer is yes, you’re ready for the next step: download our free guide to startup investing, How to start up investing in startups.
We’ve worked hard to cover all the basics and keep as impartial as possible – as well as to make the guide beautiful. We’d love to know what you think, if there’s something you reckon we’ve overlooked or if you’d simply like more information. Get in touch!