10 tips for start-up investors

With super low interest rates and uncertainty in the share and property markets, investor activity in the start-up space has been red hot.  Start-ups and early stage private businesses are obtaining some eye-watering and unsubstantiated valuations.

It goes without saying, picking a winner in the start-up space is notoriously difficult. Even the best Venture Capital firms expect only 1 or 2 strong performers out of an entire fund’s portfolio. So, what do you need to be looking out for when making an investment in a start-up or privately held company?

When faced with imperfect or incomplete information, you really need to cut through the noise and remember a few basic lessons when it comes to investing. Here are some of our key learnings from our journey so far:

  1. Does the business solve a problem? Invest in a company that solves a real problem and that people will buy from or already do buy from.
  2. Invest in people. The start-up journey is so fluid – expect strategies and business models to change. Are the founders capable of rolling with the punches and executing in a fast paced and dynamic world?
  3. Make sure the founders have skin in the game. It can’t just be sweat equity – it must also be cold, hard cash. It’s key to share in the upside and downside together.
  4. Do your research. If possible, get to know the people and the business. Take a short-term advisory role before plunging in with both feet.
  5. Who’s doing what? Don’t invest based on the calibre of the other investors. Invest in the people who drive the performance and who run the company.
  6. Pay for proper, qualified advice. That means tax, legal, accounting, everything.  And this goes without saying, but make sure you have a Shareholders Agreement drawn up and signed! 
  7. How big is the opportunity? Assess the size of the opportunity you’re looking at; realistically, how big could the potential market be?
  8. Don’t be dumb money. If you’ve got skills to contribute, don’t be a silent investor.  Invest in a company where your advice and support are valued.
  9. Focus, Focus, FOCUS. Ensure the founders live and breathe the company’s success  – too many side projects equals a distracted entrepreneur.
  10. Don’t be overconfident as an investor. Understand what you don’t know and recognise your ignorance. There are always things we overlook.