According to a study by the GetInvestor business platform, 90% of large Russian investment companies plan to intensify their work with startups. Among the most popular areas are: FinTech, Big Data, Machine Learning, B2B Software and blockchain.
The given statistics show that smart investments in new ideas have a high chance of success. Today we will consider how to choose a startup for investment and increase equity capital.
What is a startup?
Literally translated from English, “start up” means “launch”, “start”. Therefore, many mistakenly equate startups with any new business projects. To understand the key difference between these terms, let’s refer to the definition from Wikipedia:
The words “with a short operational activity” do not mean that in 3-4 years the company will cease to exist. The fact is that the main goal of a startup is to “feel” a new effective business model that will quickly bring good financial results.
When such a model is found, a large corporation is created on its basis – that is, a startup is reborn and reaches a higher level. But an ordinary small business enterprise develops according to a ready-made scheme tested by many organizations and during its existence does not make powerful leaps.
A few more distinctive features of the startup:
are based on innovative ideas;
focused on quick sale of goods;
have high risks of failure;
develop with the help of modern technologies;
if successful bring huge profits.
And one of the main differences is the lack of sufficient capital. That is why novice startups are always actively looking for venture investments. Who knows, maybe you will join the ranks of lucky people who raise decent money on fresh ideas.
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Is it profitable to invest in a startup?
So, you have the necessary amount, but you are not sure that investing in startups will turn out to be profitable… Such fears are completely justified. According to statistics, 90% of startups fail.
However, if successful, the return on investment in a startup is much higher than the return on investments in existing companies.
The following recommendations will help you avoid a fiasco on the financial front:
Take a course on import substitution. After February 2022, the Russian market will experience a lack of many Western technologies. Today is the time to find a startup that bets on the development of scarce areas. For example, cloud services, IT solutions, ERP, chips for transport cards or components for cars.
Don’t invest in products you can do without. According to expert forecasts, the already low incomes of the population of Russia will continue to fall in 2023. Accordingly, spending on entertainment, recreational activities, self-improvement and other optional areas will decrease.
Study the business plan. Investing money blindly is a bad idea. Ask the startup for a detailed business plan that includes financial indicators, target audience analysis, and product features. Just to be safe, do your own market research.
Involve experienced specialists in the business. The role of an investor is often not limited to simple financing. If possible, raise the issue of strengthening the team with excellent specialists who, for known reasons, remained unemployed in 2022. First of all, IT experts, marketers, financiers.
Also, to reduce possible risks, do not put all your eggs in one basket. Continue searching for startups until you have selected at least 3-4 suitable projects and distribute capital evenly among them.
Stages of development of a successful startup
A startup, like other organizations, goes through a series of successive stages of development. Moreover, an investor may be needed at any stage. Keep in mind that investing in business is much more risky at first, but in case of success – more profitable.
Key stages of startup development:
Presowing. The startup has an idea, but so far there is no clear understanding of how to develop it.
Sowing. The founders research the market and competitors, prepare a business plan, a pitch deck, and think about directions for an advertising campaign. It is at this stage that the involvement of investors is most often needed.
Death Valley. Entrepreneurs create and test a demo version of a product or technology. This stage has such a name because it is not experienced by about 50% of startups. This happens for a number of reasons: due to the lack of a clear development strategy, disagreements in the team, incompetence of the involved specialists, etc.
Launching. The company prepares a release and presents the project to the target audience. Major resources are spent on marketing, product improvement, and team building. At this stage, additional investment is often required.
Scaling. Here, startups work to strengthen the company’s position, redistribute the budget, attract new employees, and develop the foundations of corporate culture.
Maturity is the stage of maturity. The startup acquires the status of a successful company. Now its owners can breathe a little and enjoy the results.
Investments in start-ups are also attracted in stages. The required amount is divided into several rounds. This helps to minimize risks and timely adjust the business plan.
How to invest in startups: 5 working strategies
You can invest money in a promising business idea in several ways. Let’s consider the 5 most effective strategies:
- Crowdinvesting. Its meaning lies in the co-financing of a startup by numerous sponsors in exchange for shares or a percentage of profits. The company’s products often act as an additional reward. This type of investment is suitable for those who have small amounts.
Private investment A person invests his own money in promising projects in exchange for shares of new companies. This method is suitable for experienced investors who know how to analyze the market, calculate risks, and know how to choose a startup for investment. It is also necessary to have a good understanding of the area that is planned to be financed.
Investing through venture foundations. In terms of format, this method resembles crowdinvesting. Only the sponsor here disposes of his money not independently, but transfers the funds to a specialized fund, whose management decides where it is more profitable to invest.
Investing through brokers. It works according to the principle of stock exchanges. Brokers act as mediators between startups and sponsors. They check potential participants of the deals for reliability and for a certain fee “match” interested parties with each other.
Admission to the investment club. Partnership relations prevail in such organizations. All risks, profits and responsibilities are shared in proportion to the amount of money invested.
Of course, there are other ways to invest. For example, creating your own venture fund or business incubator. Tens of millions of dollars will be needed for such experiments alone, because at the initial stages it will be necessary not only to invest, but also to rent an office, purchase office equipment, and pay employees.
Where to find a startup to invest in
Beginner investors are faced with the following situation: the money is there, the method of its investment is determined, but it is not known which project to use it for promoting. To make the choice easier, consider how to find a startup to invest in. Today, there are a number of specialized online resources for this.
Examples of sites where startups and potential sponsors meet:
City of Money. Crowdinvesting platform where you can invest in small and medium-sized businesses. The size of the starting capital is 10,000 ₽.
Napartner. Startup Exchange. Hundreds of business ideas from various fields are posted here. Each project is accompanied by a detailed description (with terms of cooperation).
SberUnity. One of the largest venture platforms in Russia. A nice feature is the “Import Substitution” section, which includes startups that are ready to offer technologies similar to foreign ones.
Rounds. An investment platform where you can buy shares of promising domestic companies. The minimum investment amount is 50,000 ₽. Before placing on the platform, startups provide an audit opinion on financial statements.
Start2up. A site that accumulates hundreds of startups with a detailed description. For convenience, all projects are divided by business areas and regions.
Simex. This platform is perfect for beginner investors. Here you can invest only $5-10 in projects you like. Investment is made in one click.
SZTSTT. The advantage of this site is that only innovative projects based on nanotechnology are placed here.
GetInvestor. The catalog of the resource contains cards of dozens of startups that are looking for investments. All projects are divided into categories and stages of development.
You can also find many cool startups offline. To do this, attend thematic events, such as economic forums, business seminars and conferences, investment exhibitions. They meet not only experienced entrepreneurs, but also beginners who are ready to offer fresh ideas for business.
How to choose a startup
You will find hundreds, if not thousands, of projects on the sites discussed above. But which one to choose is a difficult question. Eyes widen and all ideas seem cool. Let’s consider how to choose a startup for investment.
The following recommendations will help not only to save the invested money, but also to increase the capital:
Give preference to popular destinations. For example, IT solutions, e-commerce, green technologies or EdTech.
Analyze the benefits of the project. Sometimes a pacifier hides behind a pretty wrapper. Consider how well the product meets the needs of the target audience.
Pay attention to the command. As practice shows, amateur startups, who have nothing but an idea behind them, quickly “blow off”. See if the owners have relevant experience, if a business plan has been developed, if they are recruiting new professionals to the team.
Analyze the market. Find out how much similar products are in demand today and at what pace the demand for them will grow. Look at the work of competitors and try to understand what makes their new company superior.
Study the financial plan of the startup. This will help to estimate the amount of initial costs, and even understand whether additional investments are needed and at what stage the product will start to bring profit.
If the startup has passed the check on all points, you can invest. If there is the slightest doubt, it is better to consider another option. Many promising companies are entering the market today, so there is something to choose from.
With the right approach, investing in a startup brings huge profits. However, do not forget that even a carefully thought out and calculated business model a hundred times does not guarantee success. The development of a young company is influenced by many factors – changes in market conditions, appearance of competitors, financial crises.
To minimize investment risks, consider a few simple rules:
- Do not invest loan and last money.
- Formulate clear requirements for startups.
- Invest only in those areas of business in which you know.
- Make informed decisions, but don’t think too long.
- Make an investment in a business legally.
- Diversify your investment portfolio – invest in several startups at once.
- Be patient.
- Think in advance about the exit strategy from the startup.