7 Tips for Investing in Your First Company Startups have an intoxication allure for investors but expect to get rich slowly, if at all.
By Murray Newlands Edited by Dan Bova
Opinions expressed by Entrepreneur contributors are their own.
Investing in your very first company can be exhilirating. It's a new challenge, a new learning opportunity and a new experience that's unlike any other. However, successful investing isn't easy. If you're not careful, a poor investment opportunity can eat up tons of your money in the blink of an eye.
Every investor wants to see their money work for them, bringing back a return that dwarfs their original investment. But, to do that, there are a number of things that you need to know, especially as a first-time investor. To alleviate your risk of losing out on a failing business, know exactly what you're signing up for before you hand over your money.
Related: Getting Started With Angel Investing
Here are seven important tips to keep in mind.
1. Look at the brokers running the business. There doesn't have to be a big name behind a company for it to be trustworthy or stable. However, a big brand backing a startup certainly adds to the company's credibility and helps solidify their financial future.
Larger names can afford to be more choosey with whom they bring on to work with the company. Smaller brokerages have to be more adaptive to pick up clientele. But, that being said, small brokerages can also be beneficial if the brokerage has a positive history. Do your research about the company and its supporters, find out who or what is involved in the company and make the decision that suits you best.
2. Wait until a company's lock-up period Is over. A lock-up period is a when the people who already own stock in a company are not allowed to sell it. This lowers the risk of the financial backer, as well as the risk to the stockholders, to a degree.
Wait until this period is over and look at how many of the stockowners still have their stock. This is a good indication of where the company stands and can show if the business has a plausible future, helping you mitigate your risk in the situation.
If a majority of the original stockowners are holding onto their shares, it's likely the business is finding success and showing growth. If the original stockowners are abandoning their shares, it's probably a sign to hold off investing in the business.
3. Read the company's prospectus. A business prospectus is not a fun read. It is a great insight into how a company is run and should outline risks and benefits of the investment.
Take your time to look this document over and weigh the pros and cons of investing in a business. Make sure that the business plan is clearly laid out and highly detailed. Ask yourself if the risks are worth the rewards. This will help you gain a clearer picture of the investment and help you with tip number four.
Related: Richard Branson on Convincing Investors to Fund Your Tech Startup
4. Be cautious. Always be cautious about placing your money in a young business, especially when you're looking to invest in online businesses. Caution is key to your success.
A business that sounds good on paper could be a flop in reality due poor management, a bad market or lack of focus. That's not even touching on "businesses" that are just scams dressed up as legitimate companies. If it sounds too good to be true, it probably is.
5. Your returns may come slowly. Small businesses need all the money they can get, which is why you shouldn't expect to see a return on your investment in the near future. More than likely you'll have to wait a few years to see your profits come in, especially if you're investing in an early-stage startup.
Investing is a "big picture" move. Patience is a virtue. Don't be surprised if you don't see any money for the first couple of years.
6. Have an exit strategy. With any investment, there's always the chance that things will go wrong or simply don't work out as planned. It's important that you have an exit strategy if things start taking a turn for the worse. Address this with the business owners before giving them funding.
With every investment, you're taking on some amount of risk but with an exit strategy, and explaining it from the get-go, you can give yourself a bit of a cushion on a somewhat risky move.
7. Seek the help of a financial advisor. If you're feeling uncertain about a particular investment opportunity, seek the help of a financial advisor. They will be the best resource available to help you avoid any loss that may come out of your investment.
Investing for the first time can be exciting, stressful, challenging and highly rewarding all at the same time. As long as you've prepared yourself and know what to look for in a business, how to manage your investment and what to expect in the long run, investing in your first business can be a fruitful endeavor with the potential to change your life forever.
Related: Funding 101: How to Position Your Startup as a Good Investment
