In our new ‘Guide to Investing’ blog series, we lead you through seven steps of investing. The third blog in the series is dedicated to analysing a startup and using other people’s opinions and experiences to make smarter investing decisions. Stop thinking you can do everything yourself and learn what to focus on!
Analysing the startup
Investing in startups is very complex because there aren’t a lot of data points out there. If you are looking at listed companies, they have yearly income statements and balance sheets. To be able to read those, as an investor, you could rely on an equity analyst: someone who does the work for you. The thing with startups is there are no equity analysts out there; there are no people who can crunch the numbers and create an investment report based on them.
There are a lot of subtle things you have to look at as an early-stage startup investor: the product, the market and the team. The team is especially important because over time they shape the product and the organization based on their ability. Unfortunately, there aren’t a lot of tools that investors can use to analyse teams.
In practice, investors rely on their own gut feeling, but their own gut feeling is just their own gut feeling. So it’s better to surround yourself with other investors with different backgrounds and different types of experiences. Different experiences can help you analyse or form an opinion about a startup and its proposition. As a team of investors, it’s important to always share your thoughts. Talk out loud; it’s the best way to analyse and put some order into your own thoughts. In the end you have to make a decision: often investor groups are just informal social groups, and in the end, everyone decides for themselves. However, you can consider other ways of going about this. Some investor groups work with joint decision making through a majority vote, or through a unanimous vote, or you can even experiment within that with ‘wild card’ special blocking or promotion rights in the hands of some investors. There is not a single formula, but you can experiment.
In investor groups, we sometimes see that each person can be responsible for a specific sector or region in deal scouting. If you’re working with a group of investors, the others could introduce you to companies that you would normally never meet. Conversely, you could recommend startups to your group members. That’s how you’re helping the ecosystem. Everybody grows and has better opportunities coming their way.
It is common for an investor not to really have a clearly defined investment focus. Many investors will say that they are specialized in a specific domain, but when you look at their portfolio it doesn’t match what they say. That’s fine; investing will always be opportunistic in the end. If you don’t have a specific focus, you can still contribute to your investor group, since your network is put together differently and you will give access to different opportunities.
If you don’t feel you have enough investor friends yet: Leapfuner’s Investor Round Table Session is an event where investors meet regularly and where valuable connections are made. Meeting regularly keeps you sharp and connected to the startup ecosystem.
Besides investors, you should surround yourself with external advisors. For example, if you have a startup which is operating in another country, it might be good to have insights into the culture of that country. If you’re investing in a CivicTech startup, it’s valuable to make friends who know how a government or a specific municipality works. If you’re not that familiar with a sector, you should be in touch with a sector specialist. Let’s say you’re investing in a FinTech startup which created a method for people to control their own pension funds. You should find a pension fund advisor, who knows how pension plans are normally set up and what kind of fiscal consequences they have. If you don’t have a budget: you can barter knowledge. If you have developed your own expertise you can trade this against the expertise of others. It’s fun.
Try to find external advisors in your own network and test ideas. Gather smart people to give you straightforward advice and then make final decisions. The more knowledge you have around you, the better the decisions and the chances of success.
To learn more about investing stay tuned for more knowledge.