Before we get into the meat of that which you need to know for investing in a startup – let’s preface the article by saying this. We aren’t going to rain on your startup parade. We want you to look at investing in your first startup as an adventure. It’s the attitude that true entrepreneurs have.
Most of the good reading material about entrepreneurship will describe them as people who think outside the box and people who innovate. You don’t do anything perfectly nor do you try—you delegate. So, don your cap of enthusiasm and take notice.
Funding for the New Startup Entrepreneur
Whether you’re a new entrepreneur or one that has a few years experience, it can still be difficult to get funding for your startup. Banks are still leery so don’t take it personally.
Most entrepreneurs get their funding from friends and family. This is generally a winning proposition as long as your agreement is crystal clear. And yes, a written, legal agreement is necessary in these cases too.
Research the Startup Opportunity
So what happens when people find out you’re a new entrepreneur and you’re approached with an opportunity? You may be a little green when it comes to sniffing out the risk. Chances are a friend or family member wants to turn an inspiration into a business.
The most common opportunities are people you know that want to open something like a restaurant. Whatever the reason is and regardless of who the person is, you need to think about the reasons you are being approached. Why does the opportunity exist in the first place?
More times than not, someone needs money. They want you to invest. Even if you can do it, take some time to ask questions and sleep on it. One of the most important things you should find out is why they need the money.
If they were turned down by a bank, be tactful and find out why. You don’t want to invest in a doomed business but you should also recognize that just because they didn’t get a loan doesn’t mean it’s a failing business.
Counting Chickens Before they Hatch
Be aware that investing in a startup that has fantastic potential may not show returns for years. In order to keep that potential going, you may have to put profit back in the system for a while. You’ll have a guaranteed income stream if you invest via a loan with a determined term.
The exit strategy is as important as buying in. It’s something that should be discussed and then put in writing. This ensures you that you have a plan to liquidate should you decide the company is not going the way you envisioned or you’ve simply decided the business no longer resonates with you.
A startup is an exciting venture. It is the passion and life blood of the entrepreneur. It lives for the next opportunity. It’s a dangerous and edgy world—the way it’s supposed to be. Do it right, and be a part of a fast growing and popular career.