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What to look for when investing in start ups for the first time

Supporting a friend or family member’s start up, adding to your existing investment portfolio, or deciding to make the transition from business owner (following the successful exit of your company) are just some of reasons you may have for becoming an angel or crowd investor.

But making that decision is relatively easy in comparison to the actual investment decisions you'll be making next.

Questions you will undoubtedly ask yourself

First of all, knowing which investment opportunities are the “best” in what can be the best performing asset class (providing you mitigate risk and invest in high growth businesses which have more chance of delivering on goals) can be difficult.

  • What actions can you take to mitigate risk?
  • How can you tell if you’re looking at a start up with high growth potential?
  • And how can you give yourself the best chance of making a return on investment (ROI)?

Those probably won't be your only questions either...

Where can you find good quality investment opportunities where deals have been listed due to their high growth potential? Online equity crowdfunding platforms are a great source of deal flow. But that's not their only benefit.

These sites allow you to invest smaller amounts than traditional angel investing would, which is great for risk mitigation. By their very nature, equity crowdfunding platforms encourage co-investment which is where you, as a smaller investor, has the opportunity to invest alongside more experienced angel investors.

And the tax incentives...

Equity crowdfunding platforms also often choose to list investment opportunities which offer tax breaks, such as the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS) - a great way to further mitigate risk on investments. For example, if you invest in an SEIS compliant business, you could receive up to 50% tax relief* on the investment you make - if you invest £1000, you could end up getting £500 of that back and the investment would have only cost you £500!

To help you remember what to look for when investing in this asset class for the first time, we’ve put together a list of 5 articles which give you the answers to all of these questions and more, from angels who’ve made investments both on and offline.

A guide to the Seed Enterprise Investment Scheme - download your copy

What to look for when investing in start ups for the first time 

9 things you need to know for startup investing

Investing in start ups can be both financially and personally rewarding, providing of course, all goes to plan. The potential is there for you to make some fantastic returns on your original investment, as long as you consciously work to mitigate risk. The upshot of this article is to follow your gut but also to make sure that your brain is involved. The business - and by extension, your investment - has to make sense.

 

The 7 due diligence basics for investing in a startup

Due diligence is the process of researching or investigating a business and/or person prior to signing a contract. It should be carried out before you make an investment of any kind. These 3 points stood out for me from this article because they're simple steps to take to protect your investment:

- Choose what you know

- Evaluate your market

- Consider partners (co-investment)

What do you think about sticking with what you know when it comes to making investment decisions? Leave us a comment below.

The important thing to take away from this article is that whilst there isn't a science behind investing at this stage, the idea is that by following the list provided, you can identify which investment opportunities are worth your time and which aren't.

 

10 things you need to check before investing in a startup

No one is going to do the leg work for you - unless you're part of an angel network where one angel takes the lead - so make sure that you conduct a level of due diligence that you're comfortable with.

On equity crowdfunding platforms, where co-investment takes place, you (as a new investor) get to invest alongside more experienced angel investors and learn from their expert and decisions.

Similar to the idea expressed above in point 3, (investing not being a science) this article suggests that while tips from other investors are useful, it's good to have you own set of investment criteria.

 

The 5Ms of investing 

Welcome to the GrowthFunders 5Ms of investing:

- Management: the team is essential (see point 1 above).

- Market: what is the size of the marketplace and is there a space for this particular business?

- Model (Business): examples include franchise, advertising, subscription, and direct sales.

- Money: how does the business intend to monetise? Using which revenue streams?

- Momentum: how much traction does the investee company already have in the marketplace, with social media followers and potential customers.

Investing: an art? Or Science?

I'd like to wrap this post up with a reiteration of a sentiment expressed in the 7 due diligence basics post above: investing in this asset class isn't an exact science. However, if you keep at least some of these tips in mind, you'll be giving yourself the best chance of making some great investment decisions.

A guide to tax efficient investing - download your copy

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Creating Value.
Delivering Impact.

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Growth Capital Ventures (GCV) is backed by funds managed by Maven Capital Partners, one of the UK’s leading private equity and alternative asset managers.