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Investing in local start-ups: what you need to know

  • Written by News Company


Investing in a new, growing company or a start-up can be a great opportunity. As well as the possibility of making substantial profits as the company succeeds and expands, you will be helping a small Australian business get off the ground and will have the satisfaction of knowing you were there from the beginning as your team goes up in the world.

However, there's no denying that investing in a start-up also carries a significant risk. The sad fact is that most start-ups don't make it, and many cease trading within the first year. As an investor, you have to face the strong possibility that rather than make money you could stand to lose the amount you put in. At the same time there are ways to minimise that risk, and to give yourself the best chance of backing a start-up that is going to be successful and return a decent profit.

 

Don't put all your eggs in one basket

First of all, there's the advice that every good investor should know by heart: diversify. Because start-ups are such a high-risk investment, it makes sense to invest in several rather than just one. Three out of five may fail, but two may succeed to the extent that you are still ahead overall. Obviously, you should invest in companies operating in different fields. This will give you a more balanced spread, and also ensures that your companies aren't in competition with each other.

 

Different ways to invest

The most obvious way to invest in a start-up is to buy shares in the company, but new businesses aren't listed on the stock market. A popular contemporary alternative way for start-ups to raise seed capital is through crowdfunding, but crowdfunding platforms don't always offer the best returns for the investor.

The Australian Investment Network puts investors and entrepreneurs together, hopefully ensuring the right combination for long-term success. There are many other platforms that allow you to go in as an "angel investor". You could also work with a professional venture capitalist that will do the legwork on your behalf and invest your funds for you. This can be the safest way to proceed but it is somewhat impersonal.

It's also possible to make investments without having to actually buy into the underlying property, using CFDs. Make sure you find out exactly what are CFDs before proceeding down that route however.

 

Do your research

Assuming you want to invest in a start-up directly, the next thing to do is to think about what area of business you'd like to invest in. It makes sense to choose a sector you already have an interest in and some knowledge of. It may be an emerging field, in which case you should investigate the size of the market and its potential for growth.

 

Look for something unique

A good start-up should offer a unique product that will really make a difference in its chosen field. Ask what makes them different, how their product or service can improve the experience of potential customers, and how it can be effectively monetized. Check out the competition- what gives your start-up the edge? How can their product or service be developed over the long term?

 

Meet the team

Once you're satisfied that the start-up has a great idea at its heart, it's time to meet the team behind it. Check out their track record, their skills and history, but also make a point of meeting them face to face and getting a real sense of what they are like as people. A good idea with bad management is a bad investment: you need to know that you're backing a team with the vision, experience, skills and self-discipline to make it work.

 

Look over the business plan

Ask to see a detailed business plan and go over it thoroughly. The start-up should have a clear vision of how it is going to progress and make a profit, and where it intends to be in ten years' time. Look over the legal documents and get expert advice. Be clear about your exit strategy: what happens when you want to sell your stake? It's easy to get swept up in the enthusiasm of the initial pitch, but remember it is a pitch. Enthusiasm and passion from the managers are vital, but so is a solid plan and disciplined focus.

 

When it all goes right, being an early stage investor is a great feeling and also a way to make impressive profits. But remember that this is a high-risk area and not one to go into without due diligence and caution. Pick your team well, do thorough research, get good advice and maintain a varied portfolio, and you'll have as good a chance of success as anyone.

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