To be part of the next company like Facebook or Google right from the start is probably what almost every investor dreams of. But to find such a unicorn is very difficult requires a lot of research and even a bit of luck.
Considering the following rules when making an investment decision, may at least maximize your probability to find a profitable investment option:
1. There must be a large market and potentially large market growth.
Having a large and growing market is crucial for startups. Companies sometimes target a niche and develop a product that is so focused that even when they outcompete their competition, there’s no way for them to become a large company.
The best companies to invest in share an extensive understanding of the market and strong metrics. Important metrics include annual recurring revenue (ARR), monthly recurring revenue (MRR), and total addressable market (TAM). A good way to make certain a company is generating a steady stream of ARR is by ensuring the product has a large and continuous demand in a big market.
Ultimately, the bigger the market, the greater the likelihood of making a sale, and the more quickly the business can grow. Growth rates for companies, while they can vary between size, industry, and country, can help forecast revenues.
2. The earlier the investment, the greater the risk, but the greater the return.
New companies can fund themselves by using founders' savings, obtaining bank loans, or issuing equity shares.
Handing over seed money in return for an equity stake is what comes to mind for most people when thinking about what it means to invest in startups.
Angel investments are typically small in size, but also have the most to gain, because at this point the company's future prospects are the riskiest.
3. Pay attention to the team.
One way to find out more about a company is to evaluate other investors in the company and to check whether the company has a well-established team. Even a no-miss idea can flounder if the team isn’t fanatical about getting it off the ground.
Vet the founder and the team's background and industry expertise, and see if they have created other businesses or products in their niche. If the company has a good team it can adapt to the market if changes arise.
It can also be helpful for investors to have experience in the industry in which the startup operates. That way you can make careful estimates on the viability of a startup in the future.
4. A distribution of the capital among several startups reduces the risk in the portfolio context.
Startups as an alternative investment also offer investors another way to think about your portfolio allocation strategy.
Instead of saying 70% stocks and 30% bonds, to transition to 60% stocks, 30% bonds and 10% in alternatives. There are several categories within alternative investments, startups being among them, and you should hold a portion of your alternative asset allocation.
Managing an Investment portfolio
Managing, analyzing, and keeping track of your investments can be tedious and even daunting, but it’s necessary. With the help of primeCROWD, staying organized and watchful of your portfolio companies and follow-on investments becomes more streamlined. Monitor your deals’ successes through our platform and find other great opportunities to invest in throughout the process and help you determine how to find the right startup to invest in.
We at primeCROWD weekly challenge new startups and try to find the most promising ones. Become part of our investor network and find out when we introduce a new startup that could fulfill our high standards.