In our new ‘Guide to Investing‘ blog series, we’re taking you through seven steps of startup investing. As a startup investor, you should start by investing small amounts, building your portfolio slowly and being patient. Practice makes perfect, so don’t forget to keep learning and experimenting along the way.
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 expensive than forecasted. Investors think that startups exit very soon, but in practice, it can take a very long time.
Whenever investors start at Leapfunder, we try to tell them it will take a long time before they see any results. Patience is vital in startup investing. It’s a marathon, not a sprint. Along the way, it is often hard to continue being enthusiastic and positive. Good startups last longer, while poor ones fail quickly. That means you will usually get a lot of bad news before the good news starts coming in. As early-stage investors know: it takes longer to grow pearls than lemons.
You should also have a rhythm. So maybe you invest once every three months, on average or 4 times per year. Of course, it is vital to maintain quality also: you should invest only if a great opportunity passes by. Over time you will slowly learn from your investments, and your level of success will likely increase. Therefore it is usually better to start with small 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.)
You should demand that the startup sends updates about the business; information flow is critical in startup investing. Train yourself to put the information in a document (e.g. excel) or some other 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 informed before any meeting.
Experimenting with financial instruments
When investors start with startup investing, they are often still used to investing in plain shares. However, the norm nowadays in early-stage startup investing is convertible notes. Remember that every convertible can be different, it’s not a one size fits all. Just like there are different types of shares (ordinary, preferred) which have different qualities, there are convertibles with varying types of qualifying events, caps or discounts.
If you invest in a startup which will eventually give you a depository receipt for shares in a particular purpose vehicle, remember that every particular purpose vehicle is different. Every startup article of association is different. If you don’t understand everything, get a professional who can read legal documents. Keep in mind that every new investment can be seen as an experiment. But whatever you do with experiments, make sure you structure them right: get all the information before you start, measure the results, and learn. You are bound to make some mistakes in the beginning, but you will become better with each investment.
To learn more about startup investing, stay tuned for more knowledge.