How To Invest In Startups?
You want to invest in the real economy and support startups or SMEs but you do not know how to do it? Various solutions are available to you, whatever your resources. Follow the guide.
Scalded by bank scandals, unwilling to invest in stone or simply because they want to support the real economy, people are looking for new ways to finance businesses, startups or SMEs. At the same time, the development of crowdfunding platforms has democratized investment.
Before going any further, let’s remember that investing in companies carries its share of risk: in the event of bankruptcy of the project, there are few investors to fully recover their initial wager. So you have to accept that risk while putting some safeguards in place.
First, whatever type of investment you prefer: find out. Documentation and literature are not lacking and it would be a shame to deprive you of these sources of information. Be accompanied by platforms or people specialized in the investment if you feel the need.
Finally, remember that, if you have the opportunity, the diversification of your portfolio allows you to better spread the risk and therefore limit it.
You have 100 euros to invest
The “Startup Exchange”
It’s the latest investment project: Kriptown is defined as the ” Startup Exchange”. How does it work? The company ” uses its own blockchain, combines the technology of ICO (blockchain and smart contracts) with the model of the IPO (the IPO), and creates a startup exchange allowing them to raise funds in euros, to then rate tokens on a secondary market . ” Tadam: Initial Tokens Offering (ITO) are born.
Beware, however: unlike the stock market, you are not a holder or owner of shares of capital but tokens that you can then exchange for money. The price of the transaction is set by supply and demand, which can greatly change prices.
For now, the projects are quite limited: only one has already used the platform and no other is announced to come. The choice is therefore limited, which can reassure indecisive people who would not taste a more varied range, but at the same time frustrate those who would invest by comparing projects. With purchase prices of tokens from a few euros, it is however the most accessible solution for those who have no more than a hundred euros to bet.
The investment In Royalties
It is a form of investment that is still struggling to become more democratic. Perhaps because it is halfway between lending and equity: more flexible than a loan, it is also less risky than equity. Indeed, it is a contract that binds the investor and the company he chooses to finance and specifies the terms of financing: in exchange for a payment, you receive a percentage of the turnover for a while. So you are a good investor but not a shareholder.
Some files are accessible from a hundred euros and such an investment saves you from having to manage the resale of your shares as is the case in crowdequity. A good option for beginner investors!
Many crowdfunding platforms share the market and some projects require an initial bet of 100 euros, no more. They are rare, but they exist! And crowdfunding is on the rise: more than 273 million euros were lent to French companies last year, a jump of 40% compared to 2017 according to the annual barometer conducted by Financement and KPMG .
Again, you will not have access to shares of capital but you will benefit from a repayment plan of your initial loan which can extend from three to sixty months according to the platforms and the projects , for an average of forty and a month. And with interest rates mostly fixed, between 3 and 12% (with an average of 5.8%), it can be an attractive bet for an investment in the short or medium term. ” It can be a good way to try to fund startups ,” says Yannig Roth, marketing director of the Wiseed crowdequity platform. Interest is limited in terms of return on investment but the risks are lower. An ideal gateway, therefore, for investors and motivated investors but whose taste for risk is not the first feature.
How to choose the project in which you want to invest?
At first, let yourself be guided by the platforms. They make an initial sorting among the projects. A note (in the form of stars or letters) is used to measure the level of risk. Take the time to read all the documentation provided by the company and the platform, which generally supports its rating with a financial analysis.
Then look at the business sector in which the company in which you want to invest is operating. The better you know him, the more you will be confident. You can of course find out about a sector, but for such a limited amount of money, it is better to focus on the markets with which you are already familiar.
Finally, do not neglect the team, which must be a reassuring element, or even a driving force in your decision. Experienced leaders will be able to avoid pitfalls more easily than people in primocreation.
And with several hundred euros?
There are two choices: bet larger tickets or diversify your portfolio. If the first option lets you see a greater return on investment or the opportunity to give in to a crush, the second, it allows you to test different projects, familiarize you with the study of a file and compare eventually the evolution of your different bets. If you are new to investing, choose the second, more educational path.
In addition, a bank account with several hundred euros opens the doors of crowdequity financing (see below), the minimum ticket in some projects is low.
You have 1,000 euros to invest
Many platforms have entered this niche. Generalist or sectoral, they present a free and qualified dealflow to investors and potential investors — the platforms performing upstream sorting between admissible and non-admissible files. It is an investment mode that is still underestimated, yet it allows people with small budgets to support the real economy and small businesses.
It is also an interesting financial investment. Indeed, the crowdequity allowing to obtain shares in the capital of a company, the investments realized by this way are eligible for the device Madelin . It consists of a reduction of the income tax up to 18% of the sums invested, up to a limit of 50,000 euros for a single person and 100,000 euros for a married or pacsé couple. This reduction should soon be raised to 25% of the investment. Only condition: stay at least five years in the capital, under penalty of having to repay the tax reduction.
Another important advantage is that crowdfunding platforms create investment vehicles that bring together all those who invest. In addition, they manage the participations in their place. A good way for people who have limited time to devote to their investment or who do not particularly want to get involved in the life of the company financed.
How to choose the project in which you want to invest?
As with crowdlending, carefully review the documentation provided and the industry to judge the market potential. Keep in mind that depending on the sector in which the proposed business operates, the return on investment can be longer or shorter. Medical technologies, for example, require time for research and obtaining authorizations that place them on the side of long-term investments. Technologies that are faster to develop, like sales platforms, will have shorter-term exit possibilities.
As such, consult the list of other shareholders already in the capital. This can give you insights into the company’s prospects for growth and in particular exit if other shareholders — corporate or industrial — are interested.
Also pay special attention to the team. To the leader, first, by assessing their ability to carry out the project. You can take a look at his previous experiences. This would have for example avoided the Hush investors from participating in a Morning 2.0 . But do not neglect the rest of the team, especially the management positions (product, technical, marketing).
What will the funds requested by the company be used for? Look at the details of the intended use and focus on what will allow the company to generate revenue: equipment purchase, commercial recruitment, advertising campaigns … On the contrary, be aware that funding research is noble but riskier if it does not help to accelerate the development of the company.
Also take the time to consider the type of shares offered. Equities are riskier but more rewarding than bonds, which are more like loans. For a first investment, these can be a good stepping stone to riskier future investments once you gain experience.
Note that the valuation of the company indicated corresponds to its valuation at the closing date of the project. This can therefore vary — strongly — in the years to come, before you can resell your stake. ” This money is never real before the sale of your shares, ” insists Yannig Roth of Wiseed. The indicator is therefore to be considered with caution.
Finally, consult the shareholders’ agreement which defines the conditions of the investment and must protect you from a certain dilution in case of new openings of the capital.
And with several thousand euros?
You can then multiply the investments, always with the aim of limiting the risk, and invest in various projects via several platforms. A good way to build an eclectic portfolio.
You can also invest in management companies, which usually have entry tickets of several thousand euros. You delegate to them the management of a certain sum, which professionals break down into different projects, without you deciding what will be done with your money. It’s a popular investment method for investors who have little time to spend managing their portfolios. On the other hand, it can also frustrate those who wish to keep an eye on the evolution of the companies in which they invest.
Finally, you can turn to some clubs or networks of business angels (see below) whose lowest entry tickets are around 5,000 euros.
You have 10,000 euros to invest
Business Angels Clubs
For those lucky enough to have a significant share of capital to invest, business angels clubs remain the best solution. With tickets ranging from 10,000 to 30,000 euros (for an average of 15,000 euros), clubs are reserved for people who have resources … but not necessarily the most experienced. ” Business angels clubs are open to everyone, including neo-investors ,” says Tanguy de La Fouchardière, President of France Angels, the national federation of business angels. Participating in a club is the best way to gain experience and to interact with other investors. “
Why become business angel?
Because you want to master all the steps of your investment: ” The business angel is an investor but also an accompanist, alone or in a group , defines the president of France Angels. He participates in the selection of files, the analysis of the company and the closing. It does not have a passive role but on the contrary very active .
Note that this type of investment is usually live and it requires a little time to track your bet and the company in which you have invested. ” It’s not a financial blow , warns the president of France Angels. The search for profit should not be the first motivation but rather the will to move the company forward , or to create local employment, for example.
How to choose the project in which you want to invest?
In addition to the criteria already mentioned, remember that the team is of paramount importance for business angels, who will have close links with the people in charge. You must therefore have confidence in the person who manages the company in which you invest.
And, once again, do not put all your eggs in one basket! Diversification is a good way to limit risk and increase your chances of finding the goose that lays the golden eggs.