For new venture investors, selecting a startup to invest in can be overwhelming. There are hundreds of different industries to focus on, companies to research and CEOs to get to know. The rewards of venture investing can be great, but the barriers to entry as nearly as steep.
That’s why iSelect Fund was created. We have teams of successful venture investors thoroughly reviewing each and every startup company that comes onto our platform, before they are even accepted into iSelect Fund. That way, you’ll know that every startup investment that we have available is the best of the best.
Here are 10 common mistakes to avoid when getting started in venture investing:
- Not Taking a Portfolio Approach In Your Venture Investment: Venture investing is generally a zero-sum game. The company that you invest in either does well and exits via an IPO or purchase, earning you a multiple of your original investment, or it eventually goes out of business, taking your capital with it. That’s why experienced venture investors always diversify their holdings, placing small investment in a number of different companies, spreading their investments out rather than investing everything in just one company. According to research from the Kauffman Foundation, a well-diversified venture portfolio contains investments in at least 20 different startup companies in a range of different markets and industries.
- Investing More Than You Can Afford To Lose: It should be common sense, but venture capital investing is risky. Losses do happen. Do not invest more than you can afford in one single investment, and always keep the portion of your overall net worth — all of your savings and investment holdings — that’s dedicated to venture to a small fraction.
- Not Investing In Startups With High Growth Potential: Not all venture investment opportunities are created equal. When investing, always look for companies in markets that show high growth potential in the early stages. You don’t wait to sit and wait for years and years for a company to slowly grow its revenues before exiting. Startups that show high growth potential early-on generally deliver the best returns.
- Ignoring the Business Idea: What is the positioning of the company? Are the customers thinking of the product or services? Does the company have a good mission statement with a core purpose? Does the company have a good vision on what they want to accomplish? Does the company have good approach toward its customers?
- Forgetting About Competitive Advantage: Warren Buffett likes to say he invests in companies with good “moats.” What that means is he wants the companies in his portfolio to be well established in their industries and to have solid competitive advantages. It’s the same when investing in startups. Is the company in a favorable position against its competitors? Can it produce goods or services at a better price than their competitors? All of this matters as the startup looks to grow and scale over time.
- Investing in a Startup That Does Not Have Enough Market Size or Projected Market Growth: A good idea is one thing, but how many people will actually pay for the product or service that results from that idea? All startups are optimistic about their prospects, but as an investor it is important to be real. Is there a high demand for their product, service or technology? Enough to support a growing, profitable business?
- Considering a Startup That Can’t Scale Distribution or Production: The internet has changed our world for the better in so many ways, but possibly the top proposition — at least in terms of startup companies — is that it has allowed new ventures to rapidly scale up their services and processes without expending much capital. All of a sudden, entrepreneurs are able to source from and sell to customers all over the world. Is your startup taking advantage of this potential? Can the company produce large numbers or the product or service large numbers?
- The Startup Does Not Have Enough Revenue Coming In: It’s business 101, but always make sure and company you’re considering investing in has enough revenue coming in. Many startup companies are not revenue positive in the early stages and that’s OK as long as they’re in a growth market with a lot of potential. But it’s always important for venture investors to see at least some business traction happening in the form of revenue before investing.
- The Startup Does Not Have Any Distribution Channels: Does the company have any wholesalers, retailers or distributors set up? Have they established themselves with the relationships they will need to grow and flourish in their industry?
- Not Researching The Founders Of The Startup: It is always a good idea to research the founders’ backgrounds before investing in a startup company. Did they graduate from top colleges? Do they have business experience or experience is this field? Does their startup plan make sense for their experience?