Investing in start-ups and growth companies is exciting, but there are also investments with certain risks. Because start-ups are at the beginning of their business development and work mostly on business ideas that have yet to prevail in the market.
That is why venture capital is mentioned when investing in start-ups. If you enter at the early stage as a crowd investor, you also have the opportunity to participate in shares of the start-up's profit or sale and thus achieve high returns. In order to make your investment in start-ups successfully, we present 5 tips that experienced crowd investors follow when investing in start-ups.
Check the risk capacity and risk tolerance
Crowd-investing (also known as equity-based crowd-funding) offers high returns at the meantime with high risks. The question that should be answered here is whether the loss of capital is bearable or not. In case of doubt, are you able to give up the invested money? Only after these questions are considered, then you can be involved as a retail investor in crowd-investing.
Since to invest in start-ups are considered as venture capital, early crowd investors will also be rewarded for their courage. The growth companies offer investors a fixed interest rate of up to 8 percent as part of a venture loan. Although start-ups cannot offer such high fixed rate, but for small investors, they will get return from subsequent profits and can expect high returns if the start-up company get sold (also called exit).
Every crowd investor has to decide for himself whether he is prepared to take the risks or not. This question is related to the type of investor. For the defensive and conservative crowd investors, security is more important than return. By contrast, the moderate and risk-focused crowd investors are brave and at times are willing to take on greater risks in order to gain the prospect of higher returns.
Spread risks in portfolio
In general, investors can reduce the risk by spreading or diversifying the invested capital among different investments. This also applies to start-ups: the capital should not go to a single start-up. The portfolio theory asserts that the sum should be distributed over several investments, in this case to several start-ups.
If an investment does not succeed, successful investments in other start-ups can offset that loss. Crowd investors should be careful to invest in companies with different industries and different business ideas. When a crisis hits one particular industry, not all investments in the portfolio are affected equally.
Gain experience
No one invests in crowd-funding alone, but always together with others. That's why Companisto has the Investors' Forum in the profile of the respective financing round, in which the crowd investors (called Companists in our case) exchange ideas, either with each other or with questions to the founding team personally. This way, all open questions between the crowd and the founders can be clarified in advance.
By attentively reading the questions asked by other investors and the respective answers of the start-up one gets an even deeper insight and profits from the knowledge of the others. Through this exchange with the founders and the crowd, crowd investors themselves become part of the founding scene. Since you can become a crowd investor in start-ups with an investment of only 100 euros, it is possible to start with relatively small amounts of money. So everyone can find out for himself which investment opportunity is right for him.
Thoroughly read contracts and company profile
The participation agreements at Companisto are standardized. A few parameters change depending on the financing, such as the exact participation rate, as it depends on the company's valuation, but in general they are the same contracts. Therefore, it is worth taking the time to read everything thoroughly when investing in Companisto.
When deciding which start-up to invest in, it's not just the business ideas, the team and the business plan also matter. The central questions are among others:
- Will the product perform successfully on the market?
- Is the need for capital described on the start-up's profile comprehensible?
- Is the monetization strategy of the business idea understandable and likely?
The last point means that the start-ups should at least already know how they want to earn money in the future with their business ideas. This point may sound almost too logical for it to be addressed.
Stay informed
Crowd-investing is a long-term investment. The participation in a start-up (not in venture capital for growth companies) lasts usually over five to eight years. Quarterly, the companies send reports in which they inform the crowd investors about the current situation of the company. These quarterly reports allow the investors to keep an eye on the start-up's development and thus their own investment.
Experienced crowd investors also keep themselves up to date. They not only follow the development of their company, but also observe the founder scene in general in order to recognize new trends in time. In this way, they can find out innovative business ideas and possibly the right start-up company. It makes sure that they can participate early on crowd investing.