More and more people are betting on focusing their investments on startups. The moment money is deposited in a startup, and the goal is to minimize risk and maximize return. However, to do so, you have to draw up a strategy that allows you to achieve these objectives. Randall Castillo Ortega, the founder of RACO Investment, explains the different methods of investing in startups and how to better secure the investment.
The maximum valuation of the company in which it will be invested must be taken into account. “If we know the sector well, it will be easier to find out whether the company proposes a reasonable valuation or not, and in that case, we can decide what contribution you can make within the margin. If not, it is best to let a third party we trust carry out the analysis and due diligence, and co-invest with it,” says Castillo.
Before investing, define an investment entry and exit strategy: what type of companies to invest in, the maximum amount of each investment, what to ask for in return, and what is expected to be achieved. In addition, keeping track of investments will minimize risks. If you have experience in the sector, you can help companies grow faster and avoid basic mistakes, but you have to make the dedication very clear from the beginning so as not to generate undue expectations.
Reserve funds to attend later rounds. Explains Castillo, “If the investor dilutes too soon in the most interesting companies in his portfolio, he or she will lose the advantage associated with having entered the initial phases and therefore higher risk.” The investor’s shares should have associated the same rights as the investors who enter later. Clauses that limit or harm your rights for your benefit, such as preferential settlement, should not be accepted.
A startup in its early stages is an extremely risky investment, so you should only invest money that you are willing to lose and diversify as much as possible. The main challenges of an investor are related to the permanence of the founding team. Many teams change dramatically during the early years of a company’s life, causing continuity problems, mismanagement situations, and partners leaving the company, taking significant packages of shares. Therefore, initial investors should help teams create a partner pact that shields their continuity and avoids conflicts that may end the company.
If you don’t have experience investing, it’s a good idea to join a network of investors or a crowdfunding platform. They are responsible for selecting interesting projects, negotiating investment conditions and representing initial investors against other partners and investors.
Angel investors typically do not seek to lead funding rounds. They often just invest their money and expect benefits. Therefore, they do not usually go to later rounds, but usually sell their assets when the company grows or has a higher valuation. These investors recommend keeping track of investments and being clear about how you want to get involved in the company. In addition, a good investor must reserve funds in order to qualify to invest in subsequent rounds. It is important to be aware of the movements of the company and study when to participate in the investments.
To avoid possible catastrophes, the person who wants to invest must be aware of the risks. Startup investments are risky, as there are no studies or certainties of where they are going to go. Sometimes, teams suffer many variations and personnel movements. Angel investors have to deal with potential uncertainties and stay close to the founding team. The success will be to create a compact team and believe in it.
Startups must protect their rights with respect to future investors. When a project sees the light, there are always many hours of work, ideas, meetings and essays behind it. It is essential to note that the initial phases concern many risks and that the investor may lose the amount invested. Therefore, he or she must be aware of how much will be invested, anticipating possible setbacks. On the other hand, if the project succeeds, the investment rounds will be expanded and that is when other investments enter because of the knowledge of the good results.