How To Select Startups To Invest In

Investors have different reasons for selecting the businesses they invest in. Ultimately it’s likely that they’re hoping to get a return on their investment, but there are also a wide range of other factors that can influence an investors decision. 

Many businesses that raise on Seedrs have large communities of customers and brand lovers, that they hope to turn into investors, so many of our investors are customers and loyal fans of the businesses they’ve invested in. Others are seasoned investment professionals that use Seedrs to get access to an alternative asset class and to discover exciting business looking for investment, with the hope of generating outsized returns. Some enjoy the process of discovering, selecting and investing in businesses, and see it as a hobby as well as an investment.

Whilst some are motivated by returns, we also find others invest more in support for a business or a founder’s mission or product, and find that enjoyment in joining a business on its journey is more important than financial gain. Regardless of an investor’s main motivation, a common thread that runs through all of these groups is that they’re investing their hard earned money, and this should be managed well and, hopefully, returned alongside profits.

Start With The Business

When making your first investments, we always suggest investors start their search based on their previous experience. Spent a decade working in finance? Maybe fintech is the first sector for you. A committed vegan and passionate about its impact on the world? We have plenty of vegan brands raising funds listed under food and beverage. 

Each investor will have their own unique experience and interests in different categories and starting with this as a selection criteria can allow them to apply that knowledge in deciding whether an investment is right for them. 

Completing Your Due Diligence

Once you’ve decided on the business you’d be interested in investing in, it’s time to complete your due diligence. 

Due diligence is a crucial part of making any investment. Most people wouldn’t buy a house without seeing the property, the area, the relevant documents etc. So why would you invest in a business without knowing what you’re investing into?

A Reminder On Risk

Investing in startups is inherently risky. By their nature, startups are doing innovative things, working in new areas or disrupting existing markets, making the chance of failure very high and putting investor capital at considerable risk. Investors can better understand the level of risk they’re taking on, and perhaps even mitigate a little, by conducting their own due diligence before making an investment into a company.

You can learn more about the risks of investing in our earlier guide ‘What Are The Risks Of Investing In Startups?’.

What Investors Should Consider Before Investing In A Startup

When deciding what investments to make, investors may want to consider the following factors:

Define your investment criteria

Defining your investment criteria is often a good place to start. Different investments have different levels of risk – investing in a family and friend’s round for a super-niche consumer product is very different from buying a public share in Apple, as an extreme example. 

Investors could begin by clearly outlining investment objectives, risk tolerance, sector preferences, and expected returns. This helps form a framework on which investors evaluate each investment opportunity based on their specific requirements.

Review the business plan and financials

Every business should have a clear business plan. We require every business raising on Seedrs to have a campaign page where they’ll set this out in both the video and the campaign text. Is this something that you as an investor believe in? Do you see the potential for growth and success?

Financial performance to date is crucial. Unaudited financials can typically be found in a business’ pitch deck (available on request from the campaign page), and any UK business is required by law to submit their accounts to Companies House. You can navigate straight to a business’ Companies House records by clicking on the ‘Company Number’ on the campaign page. 

Each campaign page will feature the ‘pre-money valuation’. This is the valuation of the business that the fundraise is based on, before the funds being raised are added (this is the post-money valuation). ‘Valuation multiple’ is an industry term given to the calculation of valuation divided by current revenues, so a business that generates £100k in revenue and is valued at £1m has a 10x multiple.

Different industries and macroeconomic factors dictate different valuation multiples, but this is typically a good place to start with understanding if a business’ valuation is reasonable and in line with public and private comparable businesses.

Always be sure to take a look at the ‘Key Information’ tab on the business’ campaign page. Here companies disclose any outstanding debt or shareholder technicalities that may impact your decision to invest.

You can learn more about what’s included on the campaign page in our guide ‘How To Invest In Startups’.

Review the team

A businesses’ management team will be in charge of investing the funds raised and growing the business, hopefully to a point of exit. It’s always good to research members of the leadership team to understand their background and determine if you feel confident in their ability to grow the business successfully. 

When it comes to ideal individuals to build and exit businesses there’s no one type who achieves over others. We’ve seen first time founders have as much success, if not more, than founders with exits under their belts. Review their backgrounds, the strengths and weaknesses of the team, and decide if you feel comfortable to back that group of individuals. 

Assess the market and competition

Some businesses will have an innovative idea that starts a market of its own, others will be disrupting multi-billion dollar industries. Whilst one will have ‘multi-billion dollar market opportunity’ on their campaign page, and the other may only have rough estimates of the market size, one is not necessarily better than the other. Businesses that create their own market category can succeed over and above those that are disrupting how something has always been done.

Take a look at what other businesses are out there doing the same thing in the same space, understand if you believe the business you’re investing in is likely to be the best in the market, and use this to aid your investment decision. 

Assess the technology and intellectual property

If the business is technology driven, it’s worth assessing the quality and uniqueness of the technology used, and how defensible it is. If there’s a big competitor in the market who could come along tomorrow and recreate the technology, that may be a red flag to an investor. If what the business is doing is highly defensible and hard to do without their unique skills and understanding, this can be a useful factor when it comes to exiting the business. 

Intellectual property is key here. Patented technology is the ultimate layer of defensibility for a technology startup, so make sure to check what patents a business has, if any, and the quality of these.

Scalability and growth potential

Startups may be working with a basic version of a product whilst building more, or working in one geography. It’s worth exploring whether the business model is viable in other geographies, or if a technology can be applied to different industries. The greater a business’ ability to scale and grow, the greater the potential market size, and the higher a valuation is likely to be able to go for an investor exit. 

Exit strategy

Startup investors invest on the premise that the private company will eventually exit, either by going public, being bought by another business, or merging with a competitor, resulting in all shares being sold. 

Businesses will typically have an exit strategy in mind when raising capital, and it’s worth exploring whether you believe the business has the potential to achieve an exit.

You can learn more about the different kinds of exit strategies for startups in our guide ‘How Do Startup Investors Make Money’.

Once Due Diligence Has Been Completed

Once you’ve done all the relevant due diligence and have made your decision on which business to invest in, it’s time to execute that investment. We covered the steps of making your investment in our guide ‘How To invest In Startups’.

What Happens After I Invest?

Once you’ve made your investment into a business, it’s time to wait. Monitor the business, engage with their updates, continue to support them, and watch the business evolve. You can learn more about what happens after you’ve invested in our guide ‘What To Expect As A Startup (Seedrs) Investor’.

How Do I Make Money As A Startup Investor?

Startup investors make money by selling their shares at a higher share price than they paid for them, just like in public companies. You can learn more about how startup investors can make money in our guide ‘How Do Startup Investors Make Money’.

If you’ve found these sections useful, you can sign up to our monthly investor newsletter, the Seedrs Supplement, where we often explore these topics in more detail and share insights and case studies to help our investor community on their investment journeys. 

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