Early stage investing can be extremely beneficial for all parties involved, including startup technology companies, the entrepreneurial ecosystem as a whole, and of course, investors.
But, it can be difficult to get started.
As an investor myself, I know first-hand the obstacles that must be overcome before finding success in this area. Let’s first take a look at some of the most common deterrents.
- The financial community (banks, lenders, etc.) tends to do things the old way, and through history, has thought of early stage investing as a big risk.
- Investors fail to recognize the indirect benefits of early stage investing.
- In the past, the investor community has done a poor job at providing transparent and accessible avenues into early stage investing. It has been too much of a crutch.With that said, I believe early stage investing, especially in technology and innovation, creates wealth potential and great new companies. Here are three general reasons why:
Payoff can be big
Investing in startups is not for the faint of heart, but the rewards can be significant. Unless you are a founder or family member of a founder, chances are you will not be able to get in at the very beginning of an exciting new startup. As an investor, you can. Afterall, it can be exciting to learn about new technologies and to meet the inspiring entrepreneurs who are leading the way. It is also a way for investors to use their skills, capital and networks to support these up and coming businesses.
Mitigate risk
Of course, there is risk involved, and you should understand that. The reality is, most early-stage companies fail. To mitigate some of this risk, investors can support startups who have solid business plans, a well-planned pitch and the reputation for stringent due diligence, but they cannot eliminate the risk altogether.
Another rule of thumb: investors and entrepreneurs only succeed at a partnership when their interests and expectations are aligned. So, if you only plan on writing the check, you may want to think twice before you invest in a startup. Instead, plan for a long-term commitment and remember, the real work begins only after you provide the funding.
Understand value and growth propositions
In investing, as I mentioned before, due diligence is critical. Understanding why something is a good product or service is just as important as determining if the founder can execute and scale the business. Much of this is evaluated before agreeing to make the investment, but sometimes it will not become fully apparent until after the money has been handed over.
Remember, great ideas without execution are just ideas, and not all startup companies are good investments. Do your research and understand that the relationship between you and the entrepreneur is a partnership — hopefully one that can be cultivated over time to create the potential for a huge payoff.