Ever wondered what investors look for in campaigns before investing? Putting money into early-stage businesses can be highly rewarding, but it’s also a high-risk asset. And that’s why it’s best to put money into a broad range of financial instruments and asset classes. Early-stage equity should just be a part of your investment portfolio. But, before investors decide to put money into an early-stage business, they usually scrutinise the campaign to look for certain details and features in the campaign, such as the following.
See what the company’s doing
Has the company already built a minimum viable product (MVP)? Are people already using the service or product and are there any testimonials? Has the company attracted press coverage or won awards? If so, these should be featured in the campaign.
Research the dream team
Dig into the campaign to see who’s running the business and who are the key employees. Discover if they have a track record for creating or building businesses that become successful. Can you see if they seem genuinely enthusiastic about the venture they’re currently involved with? Dig into the campaign to see if they have valuable experience of the sector their business is in. See if it’s possible to see them pitch live at an event, so you can talk directly with them.
Is there an ‘Aha’ moment?
Some investors, especially venture capitalists (VCs) look out for businesses that make them feel as if they’re witnessing something special. For example, they might look out for campaigns from companies in the tech sector that do something that no-one else offers. Or they may look for a business that offers a major leap forward.
See if there are pre-emption rights
Many investors feel that this as a very important factor when investing in a business. That’s because these rights are deemed to be necessary to protect shareholders against dilution of their shareholdings.
Here’s an example that illustrates why many investors feel pre-emption rights are crucial:
- A company has 100 shares. Let’s say that your investment bought you one share out of the 100. You now own 1% of the company.
- Now, imagine that you invested in the next big thing and it’s going to be sold for £100m next week. You calculate that you could get £1m!
- If there are no contractual pre-emption rights, the entrepreneur could issue 1,000,000,000 new shares the day before the company gets sold. Then buy them all for £1. Without pre-emption rights, you can’t buy any of them yourself. So now, instead of owning 1% of the company, you own 0.0000001% of the company and will be paid £0.10.
- You can only dream of what might have been.
It isn’t always malicious, but not having the right to maintain your stake can leave you exposed to this kind of dilution.
Check it will help diversify the portfolio
Some investors carefully check how a potential investment will fit in with the rest of their portfolio. They may have found an investment with excellent potential, but they don’t want too much exposure in a certain sector.
This is all about not putting all your eggs in one basket. Instead, you could consider spreading your money across many types of business. For example, one business might be in the food and drink sector. And one might be in fintech. And another might be in the energy business and so on. That way, if the fintech sector suddenly doesn’t do so well, including your shares in particular, it wouldn’t sink your entire portfolio. A diversified portfolio spreads your risk. And not just in a single assets class – make sure you diversify across assets as well.
“I usually aim for a healthy mix with as much validation as possible. Like any investment, spreading risk by vertical and stage is crucial. It’s not short-termism, these longer horizon investments where hopefully some will pay off enough to cover any losses and beat the market over time.”
Adam Oskwarek, Consultant.
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Investing in early-stage businesses can be very rewarding. Not only can the potential returns be high, but it can also be very satisfying to support businesses. But, remember that there are risks involved. And note what investors look for.
It used to be that only select groups of individuals and institutions, such as venture capitalists or wealthy business angels would be able to invest in private businesses.
Equity crowdfunding democratises investment, enabling everyday people to invest in a company in exchange for shares in that company. A shareholder has partial ownership of a company and stands to profit should the company do well.
Seedrs is the most active investor in UK private companies. It helps all types of investors to invest as little or as much as they like in businesses they believe in, so that they can share in their success. Sign-up for free to learn more and invest.
Investing in early-stage businesses can be very rewarding. Not only can the potential returns be high, but it can also be very satisfying to support businesses. But, remember that there are risks involved. And note what investors look for
Investing involves risks, including loss of capital, illiquidity, lack of dividends and dilution, and should be done only as part of a diversified portfolio.