How to invest in a startup company

Written by allen young
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How to invest in a startup company
investing in a startup company (Getty Premium images)

The dream of every investor is find a company in its start-up stage before it is well known and invest in the company before its profits start to take off. When the company emerges and becomes a well-known name or brand, the investor will profit many times over his initial investment. Such a scenario is possible, but more often, start-up companies will fail rather than achieve large-scale success. Still, an investor can find that hidden gem if he can handle the risk. This article will guide you in ways to invest in a start-up company

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  1. 1

    Invest as a principal. The most rewarding way to invest in a start-up is to invest in your own. Think of a business idea and start a company. While this is the most rewarding way to invest in a start-up, it is also the most risky. However it does give you the opportunity to control your own destiny, and hopefully your hard work will be rewarded. If you have the skills and the right business idea investing in your own start-up can be very lucrative.

  2. 2

    Become an angel investor. If you have funds to invest but do not want to do all the work required to bring a start-up company to market, investing as an angel investor may be the way. An angel investor takes a stake in a company in exchange for its investment. The angel investor and start-up company agree on the level of participation expected from the angel investor. You may invest by yourself or combine funds with other angel investors to invest in one company or among several others to spread the risk.

  3. 3

    Invest through a venture capital group. Venture capital firms are businesses that take funds from individuals and pools their investment together into start-up companies. They take an equity stake in each company and have a portfolio of companies in which they invest. Venture capital groups are experienced with start-up companies, so you want to invest with a group with a good track record of investing in start-up companies.

  4. 4

    Invest in an industry you know about. There are many industries or services you can invest in. However you should try to invest in an industry you know something about. That way you can have an advantage over others in determining if it is a good idea or not. Investing in a sector you know about will also cut down your research time because you have a background in the area. Do not invest in something you do not understand or cannot easily find out about.

  5. 5

    Have a long-term perspective when investing in a start-up company. Start-up companies may take awhile to establish themselves or turn a profit. Oftentimes it takes many years, if at all. Many factors, such as market conditions, changing technology and competitors may delay the anticipated profit of the company. Oftentimes these factors are beyond a start-up firm's control. Having patience is necessary if you are to invest in a start-up company.

Tips and warnings

  • Do your research or due diligence. Investing in start-up companies is not for beginning investors. You should be able to analyse the financial statements of the company and understand its business strategy. Do not rush into investing in a start-up company until you have thoroughly examined the company.
  • Be prepared to lose all your money. Investing in start-up companies is high risk and high reward. Most will fail. Do not put all your funds into one company.

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