How to invest in startups: a complete guide for beginners5 (2)

The startup exchange is formed on the basis of an Internet platform on which individuals and legal entities present ideas and services. Investors can invest in the development of projects. The platforms differ in their areas of activity and profit making schemes. The Napartner, Startupnetwork, Planeta, Kickstarter, Indiegogo, etc. exchanges are popular and effectively functioning.

At what stage is it best to enter a startup?

Any normal startup has several stages of development. The earlier an investor enters the project, the more opportunities he will have to influence the company, and also, of course, the greater the jackpot. Agree that receiving 50% of income is better than 1%-2%.

People who invest in early-stage startups are called business angels. Those who buy IOUs are investors. Those who buy shares are shareholders.

The stages of startup development are usually distinguished as follows.

Idea. At this stage, startupers come up with their project, how it will work and who will need it.

Base. Here the founder registers an individual entrepreneur or LLC, attracts future startup participants (founders, not to be confused with Flounder from The Little Mermaid), creates a prototype, draws smart graphs (i.e. draws up a business plan) and tries to find like-minded people. Often the “Idea” and “Foundation” stages occur simultaneously. The result is a viable product that can be offered to the market for review.

Acceleration. At this stage, the product is tested (sometimes in focus groups, but more often among enthusiasts who are not afraid that this crap will explode or that this program is not a newfangled Trojan), the founders unite spiritually and financially (distribute roles in the project and their shares) , real offers are made to consumers.

Sowing stage. At this stage, the startup is no longer even a startup, but a mini-company. The most risky investors begin to invest money already at this stage. As a rule, their contributions are small - several hundred thousand rubles. Employees working in a startup at this stage have every chance to occupy leadership positions as the business further scales. Often for their work they receive not only a salary, but also options - they will come in handy when the company goes public. Business angels get maximum influence on the company and can even become one of the founders by purchasing a stake in the business.

Launch. Here the project was tested and rolled out to the masses. Investors who entered a startup still have a great influence on it, but they will no longer be able to become one of the co-founders and get positions.

Growth (Grown) or expansion (Expansion). The most active phase is when the product is launched and brings a stable profit, and the company scales its business: expands its staff, acquires its own production, logistics, etc. Investors are more willing to enter the project at this stage, when the risks are minimal and the rewards are still significant. Venture capital funds usually invest in startups at this stage.

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Exit to IPO. Here the company already becomes public, and you can invest in it by purchasing its shares. The influence of new investors (shareholders) is negligible. Business angels are no longer included in such a company.

So, to invest in startups, you first need to establish what stage of development it is at. This will allow us to predict what risks the company will have to face and whether it can survive them. And also determine what percentage of profit you as an investor can count on in the future.

Of course, you can find a neighbor in the garage who is assembling his pepelats, and invest in his development, and receive half of his income. But it’s easier and more reliable to invest money in projects that have already proven their viability and have passed some kind of examination.

The essence of the concept

These are investments of a private or other nature in any asset. It can be a financial instrument, product or commodity, as well as a project or startup. The idea is simple, a person has free money. And in parallel, there is a certain entrepreneur who is interested in third-party provision of financial resources. They are necessary to create, develop or expand a project. Accordingly, it is extremely logical for a citizen to simply transfer his savings to this company. So that with their help income can be increased. And in the form of receiving dividends, he can retain part of the profit. And also get back the entire amount spent.

Advantages and risks of investing in startups

Of course, the undeniable advantage of investing in a startup is its potential profitability. You can earn hundreds or thousands of percent of your initial investment. Moreover, the earlier you enter a startup, the more income you can expect.

Another plus is that a business angel can really influence the project and share their ideas, best practices and connections with the founders. And this will help promote the product, which will contribute to a faster return on investment for the startup. If you just buy shares, you won't have any effect on the company.

In the end, the investor himself will acquire the necessary connections - what if he becomes friends with the new Bill Gates?

But there are also many risks:

• the startup may not be viable;
• the company may turn out to be fraudulent, and the “founding fathers” will run away with the investors’ money;
• the product will not find its buyer;
• a better or cheaper analogue will appear;
• the wrong business model will be applied.

In general, all these risks boil down to one thing: an investor can stupidly lose his investment. As practice shows, out of 10, only 3 startups pass the seed stage and only one reaches the growth stage. So think and assess the risks.

Entrepreneur's risks when attracting investments

There are many risks for an entrepreneur:

Wrong partner

Just an investor with whom you will not be able to work effectively together for several years. Choosing an investor is like finding a wife - can you spend several years with him regularly discussing difficult issues?

Cardinal discrepancy between the goals and plans of the investor and the founder

These are constant conflicts and taking over control of the company.

Losing control

A professional investor will definitely want control over the company's work. A normal situation is when this control occurs through achieving unity of opinions in the board of directors, and not through imposing decisions.

Blocking deals with new investors

This can happen due to investor reluctance or an improperly structured deal in the previous investment step.

Startup Investment Options

There are several options for investing money in a startup:

• Purchasing a share in a company. Most often, business angels buy out a stake at the acceleration stage or at the seed stage. At this moment, they actively participate in the life of the startup and help it develop not only financially, but also with the help of intangible assets - using their experience and connections. Subsequently, the profit is distributed in the form of dividends for each share.
• Providing credit. The investor simply gives the startup a loan, and its founders pay back the money with interest. The amount of profit does not affect the refund amount in any way. Even if the startup fails, the investor will receive his money. But if the project bombs, then no one will compensate for the lost profit.
• Signing an investment agreement. Here, the investor provides money to the startup in exchange for a share of future earnings. If the project does not show profit, then there will be no deductions either. In this situation, the investor assumes all risks.

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There are other alternatives. An investor, for example, can provide premises for rent or some equipment in exchange for a share or interest in profits. But there are only three main options.

How does an incubator differ from an accelerator?

The main difference between an incubator and an accelerator is their passage time. The accelerator is usually limited to a few months and only accepts teams with an existing product, albeit in its infancy. Even entrepreneurs who are just starting their journey will receive help in the incubator.

An incubator, unlike an accelerator, provides basic services (workplace, Internet, accounting services), but does not have sufficient expertise to help develop a business. The main task of the accelerator is to have sufficient expertise to help a business grow 10 times or more in a few months through experts, methodology, business experience and connections of the management team.

Incubators usually help startups free of charge; you only need to pay for a workplace, but the price is less than a full-fledged office rental. In the accelerator, the company will take a share and help bring the business to a mature state.

In other words, an incubator is primarily about reducing costs, and an accelerator is about a significant increase in companies’ turnover.

IIDF infographics about accelerators and incubators

Where to look for startups

There are several different ways to find suitable startups. But they can be reduced literally to five groups:

• Independent search. You simply look for new businesses in your city and offer to invest money in a startup. It's simple. Another question is whether you have enough experience to assess the prospects of the project.
• Open access search. Many companies are openly looking for investors and offering them to invest in capital, for example, Boomstarter. To do this, they create websites through which they accept investments or sell shares. Or, more commonly, options with the ability to buy future shares at a discount. But here it’s easy to run into scammers - financial pyramids, so-called “hype schemes”, so study the companies carefully.
• Investments through special platforms such as Alfa Stream, which independently select projects and form “portfolios” from them. There are fewer risks here, since the companies are verified and investments are diversified. The entry threshold here is minimal.
• Investments through p2p platforms such as City of Money or StartTrack. These are the so-called startup exchanges.
• Participation in investor clubs. For example, AltaClub is a subsidiary of the venture fund AltalR Capital. The fund itself searches for startups and offers them to investors. The threshold for entering the club is from 25 thousand dollars. SmartHub and the Skolkovo Angels Club work on the same principle.

Mostly, startups seeking investment either list on exchanges or launch their own platforms to raise funds. So if you decide to look for startups online, start with these options.

Why do you need a business plan?

Answer

In order to clearly prove in numbers to the investor the profitability of the project. In theory, you need not one, but at least three business plans: optimistic, regular and pessimistic. In the first case, everything is super and the wildest expectations will come true, in the second - most likely this will happen, in the third - everything is bad and the business will not work.

We won’t discover America if we tell you that it’s better to order a business plan from specialists . They will identify the tricks and strengths of the business in order to competently present them to the investor. And everything will be packaged in a standard and clear way - potential investors will immediately understand what’s what.

Startup Exchanges

In Russia, the investment culture is not yet very well developed. And business angels prefer to look for startups directly, through friends or investor clubs. But what should private investors do who do not have sufficient capital to work at a professional level and are not able to sufficiently diversify their investments?

This is where startup exchanges come to the rescue, through which you can invest in startups. There are not many of them, but you can find something suitable. The largest are the following.

StartTrack . They position themselves as an open database of accredited startups. Serves as a platform for attracting direct investment. The investor enters into an agreement with the startup directly and bears all the risks himself - StartTrack only brings the parties together. There are really large and successful startups registered on the site that are in the stage of active growth. For example, Kostya Tszyu’s Sports Academy or Pim-Pay, a fintech service used by more than 2,000 online stores. Such startups provide more or less stable profits and carry fewer risks.

City of money. A variety of startups are presented here - from outright trash to quite promising enterprises. So you need to be able to choose. The entry threshold is from 100 thousand rubles, but some companies themselves set minimum amounts, so read the conditions carefully. In general, the City of Money recently joined two working groups: at the Competence Center for regulatory regulation of the digital economy of the Skolkovo Foundation and at the Central Bank of the Russian Federation for the regulation of crowdfunding. So there has been a significant increase in good projects on the site.

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AngelList. It's an English-language platform, but if you're comfortable with the language, you won't have any problems using the platform. Moreover, many projects from Russia are presented there, and the startupers there speak, of course, in our language.

Pipeline. It accepts only large projects on its balance sheet, and the level of investment is also quite high - the entry threshold is from 50 thousand rubles. But what’s more important is that registering on the portal gives you access to investor clubs, and there you can choose projects to your liking or undergo training.

Thus, online investment in startups is possible, and there are many platforms for this. The main thing is to choose a suitable offer and not go wrong when signing the contract.

What not to do

There are a few general rules that will work for most startups, with a few exceptions. Let's start with bad advice on how to waste energy in fruitless attempts to find an investor.

• mass mailings of letters with investment presentations. This will almost never work. Even if you guessed right and wrote to that same soulmate and did it perfectly, the chance that your letter will even be read is small. Simply because the VC’s (venture capitalist) mailbox is bursting at the seams with letters, in 99% of cases, from startups that are completely unsuitable for him. They are all wonderful, but they are not his, the stage is not right, he does not understand anything about the market in which the company operates, and most simply write nonsense.
• go to hackathons. Hackathons are wonderful gatherings of talented people, but if there is an investor there, his attention belongs to the winners. Let's be honest, at each hackathon there is only one winner and at the hackathon he works on the technical part of the solution without testing it with market realities. An investor needs metrics of your growth in the real market. It is impossible to show them in a hackathon setting. Getting a programmer to join your team at a hackathon is a great idea, but getting an investor is unlikely. There are exceptions, but as we know, they confirm the rule.
• Crowdfunding platforms. Everyone has heard about the fantastic success of some kickstarter projects. I suggest you Google it using a search query like “top most successful kickstarter projects.” Then compare your project with what the search engine gives you, then move on to the next step. Joke. There are cool projects there. But investors do not go to crowdfunding platforms, citing the fact that there is a lot of fraud and scam there. According to various sources, the percentage of obviously non-existent or fraudulent projects on crowdfunding sites can reach up to 50. No sane person would take such risks.

Found a startup – what next?

Next, you contact management and agree on investment terms. This could be a loan agreement, direct investment, repurchase of shares, debt securities, or some other participation.

The contract must be concluded in writing. Get guarantees. It might be worth taking some kind of collateral. If the startup has no money left to pay creditors and declares bankruptcy, then at least you will receive the property.

And it’s better not to limit yourself to one startup – but to spread your risks. Startup exchanges can help you. There the entry threshold is lower - literally from 100 thousand rubles. And if you don’t have such capital, try Alfa-Stream. In general, investments are made from 10 thousand.

Now you know about investing in startups - at what stage of development it is better to invest in them, what amount should you start with, where to look for suitable projects. The main thing is to calculate the risks and compare it with the approximate income. It is better to invest 50 thousand in different startups and make a profit from one than to invest 500 thousand in one project and get nothing from it. Good luck, and may the money be with you!

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Alternatives

For a developer, the alternative is to work for a cool company. Instead of going at random, get a job in a company that does approximately the same thing and study the entire kitchen from the inside. For example, this advice is given by the founder and until recently head of the Alibaba Group, Jack Ma. First learn from the successful, and then do better than them.

For an investor, a direct investment alternative is to buy shares or bonds of an existing business. Profitability is less. You can’t even dream about a place in management (the main pools of shares have already been sold out). In return - high liquidity and at least some guarantees of return.

Another investment alternative is P2P lending. We simply give money at interest, without getting involved with the business as such. You don't get into anything at all. I gave the amount and received it back with interest.

Species diversity

Modern classification involves gradation into many types, depending on the period, final goal, and level of risk. We will highlight several techniques to make the task as clear and visual as possible.

The simplest thing is by timing:

• Long-term. Often a period of more than five years is implied. But in some industries the period starts from three.
• Medium term. At least a year. The limit is again determined by the industry. Three to five years, as we remember.
• Short term. All the rest. That is, the period is less than just one year. It is worth knowing that in some areas there is also an extremely short-term time perspective. But this is usually not an investment in some company, but, for example, the purchase of binary options.

There is a division according to the degree of risk:

• Conservative. That is, very safe, with an almost zero chance of failure. Such assets are usually needed to protect your investment portfolio. After all, they don’t make much money. But they insure their more dangerous brothers. At the same time, a conservative type portfolio can serve as a storage deposit in order to beat inflation with a small profit.
• Aggressive. There is a real, tangible chance of losing your entire deposit. But the payback can reach several days. And in the medium term, there are cases of earning two thousand percent.
• Average. The level of danger balances profitability. But there is almost always a clear bias in one direction or the other.

Government funding

The possibility of receiving a subsidy for aspiring entrepreneurs is aimed at stimulating the development of small and medium-sized businesses.

The state provides for the possibility of issuing funds for intended use on an irrevocable basis to those who:

• Registered as an individual entrepreneur for no more than 2 years;
• I agree to co-financing and already have at least half of the amount required to open the project.

To receive a subsidy, you must provide a package of documents. Then defend the business project before the commission, which will then make a decision within 60 days. The amount of the subsidy varies depending on the region where you receive it.

Getting a loan

Getting a loan to start a business is difficult. Usually it is given for the development of an existing business. But it is still possible to do this. However, be prepared that you will have to collect a whole package of documents and that the interest rates will be high. Therefore, some take out consumer loans and use the money received to develop a startup.

If you choose this source of financing, be aware of the very high risks. If the business fails, then in addition to the principal amount you will have to return large interest.

Crowdfunding

This method is becoming more and more popular every year. It provides an opportunity to collect money from Internet users. To do this, just register on the site, indicate the required amount, and present your idea. The more information, photos, videos are posted, the more likely it is that network users will find the idea interesting and contribute their funds. To attract as many people as possible, you will have to do advertising. But there are no guarantees. There is a high probability that you will not be able to collect the required amount.

What is it for

The answer lies on the surface. But not for beginners who have recently decided to try their hand at entrepreneurship. A company needs money at any stage. Especially if it is not even legally registered yet. It is thanks to either borrowed funds or investments that most enterprises begin their activities.

But even if the founders have significant capital to start with, and they do not need third-party funding to organize their activities, they will still need a methodology. After all, the new source allows:

• Grow and develop, do not hold back when forming a financial strategy.
• Increase turnover, quantity and quality of products, volume of service offerings.
• Open spheres, additional industries.
• Acquire subsidiaries or a completely new startup.
• To master the horizons in geographical terms, cities and regions of the Russian Federation, the creation of branches.

Investing is a way to avoid stagnation. Whatever the initial capital, no matter how great things are going, you can always do better. It is possible to put an additional amount of money into circulation. And increase the expected profit by paying off investors, making your own company larger, more reliable and stable.