In our new ‘Guide to Investing‘ blog series, we’re taking you through seven steps of startup investing. At Leapfunder we always advise new investors to start by investing small amounts. It is sensible to start building your portfolio slowly over years. Experience is your secret weapon, so if you keep learning and experimenting along the way you will get better.
Learn from your investments, talking to fellow investors & your startups
Both founders and investors are inherently bad at predicting the future of a startup. The money always runs out quicker than expected, and everything is more complicated and expensive than expected. As an investor you shouldn’t expect to have a good exit very soon. Your most successful exits will probably take as much as 5-10 years .
Whenever investors start at Leapfunder we tell them that startup investing is a very slow sport. Patience is vital. It’s a marathon, not a sprint. Along the way, it is often hard to continue being enthusiastic and positive. Good startups grow steadily over time, while poor ones fail fast and early. That means you will usually get a lot of bad news before the good news starts coming. As an old saying says: it takes longer to grow pearls than lemons. Many investors find it helpful to have a rhythm. So maybe you invest about every three months, so an average of 4 times per year. Of course, it is vital to maintain quality. You should invest only if a great opportunity comes by.
Over time you will gain valuable experience from following your investments. You will likely also notice that your level of success will increase. That’s why we believe it is usually better to start with small investment amounts and work your way up over time. You can also learn from talking to fellow investors. Surrounding yourself with people who have experience and knowledge of startup investing is always a great idea. That’s also the case if you don’t always agree with those people, absorbing their perspective will tend to make you smarter.
The information flow is critical in startup investing. As an investor you deserve to be kept up to date about developments in your portfolio companies. Train yourself to put store the information in some kind of filing system. You probably won’t remember every single detail, and it is better for the startup and for you, if you are always informed before any meeting. This kind of diary will also help you to process and gain experience faster.
Experimenting with financial instruments
When investors start with startup investing, they are often still used to investing in plain shares. However, today the norm for early-stage investing is the convertible note. Remember that convertibles can be different, just like there are different types of shares (ordinary, preferred). It is helpful to familiarise yourself with different types of qualifying events, caps or discounts. Leapfunder offers some powerful online training sessions about this material.
Familiarising yourself with modern financial instruments is useful. But that is not the same thing as experimenting with new financial structures. In general conservative and classical contracts work best. If the contracts are seen as standard then you won’t have to explain them to anyone, and it’s easier to gain trust. An experienced professional should be able to advise you about what counts as a standard structure in whatever market you are in.
To learn more about startup investing, stay tuned for more knowledge.