How To Invest In Startups (And Not Lose Everything)

From Silicon Roundabout to Silicon Valley, the number of startups being created across the world is simply astounding. According to Experian, 50,000+ new companies launch every month in the UK; in the US, it’s more than 500,000.

With so many new companies entering the ring, everyone is eager to be in with a chance of backing the next Facebook. But startups aren’t cash cows — far from it, in fact. Chances are, if you invest in a startup then you’re going to lose your money.

There’s no way to guarantee your investment is going to work out, but there are certainly a whole lot things you can do to help even the odds. The thing to keep at the forefront of your mind is that investing in early-stage businesses is about as high-risk as it gets.

9 out of 10 startups will fail

It’s a hard pill to swallow, but swallow it we must: most startups won’t make it past year three.

Although the reasons for why a startup might fail are countless, CB Insights has made a valiant effort in its ongoing study 166 Startup Failure Post-Mortems — an enlightening (if sobering) read.

Steve Hogan, Co-Founder and Partner at Tech-Rx, says the number one thing failed startups have in common is a single founder. ‘That is the single biggest indicator of why they got in trouble,’ he says. A co-founder can help address many of the trip-ups listed by CB Insights, including disharmony, poor marketing and hiring the wrong team.

Make sure you can afford to lose

Just because a startup is based on a good idea doesn’t mean it’s going to cash it in big; plenty of excellent ideas and best-laid plans have fallen through because of a lack of preparation, infighting, poor market fit and plain old bad luck.

What that means is, as with all investing, you need to be sensible about it. Work out how much you can comfortably do without and stick to that amount. Do your research, do your due diligence and for goodness’ sake, diversify.

Minimise the risk

There is no formula for success, no industry secret that will suddenly mean ‘investment + startup = PROFIT’. The most any of us can do is make the risk as small as possible.

So how do you do that? The simple answer is: do your research before, help out during and don’t be a child after if things go wrong.

Here’s a brief breakdown of things you need to think about:

  • How will you invest?
  • What do you know about the market?
  • Is your experience relevant to the startup and its industry?
  • What will you look for when conducting due diligence?
  • What investor protections are in place?
  • What are the stages of funding?
  • What will happen once you invest?
  • What type of exit is the company planning for? How long is this likely to take?
  • How big is the exit likely to be?
  • What potential competition (and intellectual property) does the company have?
  • Does the company have a backup plan should things turn sour?
  • Do you have a strategy for if things go wrong?
  • How will you react to down and flat rounds?

And that’s just scraping the surface. Investing in startups is an intense, exciting ball game and there’s a lot you need to know before you step onto the field. Fortunately, there’s an ace place to start.

I recently put together a free online guide called How to Start Up Investing in Startups. It takes you through an overview of your options, due diligence and, essentially, all of the points listed above.

You can download the full guide (PDF) for free here.

With an intro by Josh Maher, author of Startup Wealth: How the Best Angel Investors Make Money in Startups, and tips from experienced business angels from around the globe, as well as a list of useful online resources for the novice investor, I like to think there’s no better place to start.