Investing in new business ventures has always provided a fun and exciting way to diversify your portfolio, potentially get some very high returns on your investment, and even be involved with a service or product that could ultimately end up changing the world.
With that being said, the vast majority of start-ups (upwards of 90%) fail within the first five years, so there is also a significant amount of risk involved. Luckily, there are a few reliable best practices that can help you find success and financial returns while investing in new business ventures.
Equipped with the proper knowledge, you may invest in something that can end up being revolutionary. Read on to learn how to invest in a new business venture.
1. Don’t put all your eggs in one basket
This phrase is a cliché for a reason. Versatility is absolutely good advice for how you’re going to invest in new business ventures. There’s no doubt about the fact that it can be tempting to go all in when you come across an idea that you’re really excited about and are sure will succeed.
That’s simply putting you in way too much danger though. Ideally, you want to be starting out with a balanced investment portfolio that will allow you to play with between 5-10% when looking to invest in new ventures. In it necessary to periodically remind yourself that you could lose it all at any time, so you should never put something on the line that you wouldn’t be able to do without.
2. Stick with what you know
Sticking with what you know is an important factor for how to invest in a new business venture. You should look to put your money into an industry you know well and understand. Blindly investing in a business domain that is largely mysterious to you is a good way to get yourself into trouble and end up having regrets down the line.
Do your research on the best business investment opportunities. Be intelligent and don’t get fooled by catch-all claims that certain industries are rising across the board. You shouldn’t invest in anything trendy until you have a pre-existing understanding of the industry.
3. Consider joining an angel investor group
If you’re new to the game, you would definitely do well to get yourself involved with a group of investors who already know the ropes and can help you make sound investment decisions. Do some digging to find other players in the market that have similar interest to you and who have already found some level of success investing in that industry.
If you’re able to get hooked up with an established group, it also means that you’ll have access to more investment proposals and will be able to consider them alongside people who understand the vetting process inside and out. Each group works a bit differently, but many will allow you to spread your money across a multiple-start-up fund in order to enhance your chance of success.
4. Get involved in a local start-up incubator
Joining a local start-up incubator in order to act as a mentor or provide technical leadership is a great way to get an inside look at the local start-up scene and potentially discover some new projects worthy of your investment. When starting out, these communities also offer a wealth of resources for junior investors to begin exploring and find pockets of investment that are a great fit for their goals and interests.
The networking component means that you’ll always have someone around to bounce ideas off of and that you’ll be able to go into each new investment armed with more information and feeling more confident.
5. Don’t get lazy when it comes to doing your homework
There’s no doubt about the fact that investing in new ventures can be a fun and rewarding way to diversify your portfolio, but it also requires work if you’re going to get the results that you’re after. Unlike public companies that are required to divulge filings and details that can provide investors with a snapshot of what’s happening internally, private ventures are not held to the same standard.
Therefore, the responsibility lies in the hands of the investor to know what documents to ask for in order to gain the deepest understanding possible. Beyond the initial investor presentation, ask to see things like business plans and current financial statements to give yourself more information to work with.
6. Play an active role
You’re going to get the most out of your experience as an investor if you take an active role and interest in the companies you decide to place your trust in. It is therefore advisable to focus on local initiatives that you can actually engage with and participate in. Consider trying to negotiate a board seat or otherwise become more involved in the day-to-day operations.