With a bit of research and vigilance, investing in startups need not be a punch in the dark. While there is a lot to consider when reviewing deals, good due diligence training can mitigate risk and secure long-term financial growth for your portfolio. Investing in startups and other private companies is certainly not a get-rich-quick scheme, however with informed decisions, it has the potential to build wealth and even generational wealth. Asking yourself these seven questions will help keep you on-track.
1. Have you evaluated your financial health? More than just checking your account balances, you need to pin down how much you’ve earned in the past year, evaluate growth projections, and what you can set aside for your investments. Make sure you are comfortably paying bills and setting aside funds for savings and retirement accounts before engaging in high-risk investments.
2. Have you determined your goals and limitations while considering the current financial landscape? You want to realistically set expectations in order to set achievable goals within a certain time period, as well as figure out your comfort zone when it comes to financial risk-taking. You can consult or learn from other people’s successes (and lessons), as long as you don’t let others affect your own pace and decisions. Everyone has their own investment journey.
3. Do you prioritize startups with promising sustainability? As investors, we must remember that our investment can have a great impact on the world by supporting those companies that are solving some of our toughest environmental and societal problems. Even Blackrock, the world’s largest asset manager, pledged an Environmental, Social, and Governance (ESG) framework for all their investments, reflecting an industry-wide understanding of the significance of sustainable investing. To understand if a startup you’re interested in is addressing a sustainable issue, consider educating yourself on the 17 Sustainable Development Goals (SDG) created by the United Nations to harmonize efforts in moving sustainability forward globally.
4. Do you have multiple avenues for investment? Do you research your startups thoroughly? Any major decision that involves money requires background checks and insight. Gather as much information as you can. Do not pick the first appealing option that comes to mind. And continue keeping tabs on them during your investment period.
5. Have you created diversity in your portfolio? Much like investing in the public market (aka stocks), diversifying your portfolio of private companies is also good practice. How you’d like to organize that diversity is up to you, but make sure it makes sense for your purposes and that it is being guided by your personal investment thesis. For example, you could diversify by company vertical, by stage, by business model, etc.
6. Do you have an emergency fund you leave alone? Direct investing is a risky practice. Yes, stellar returns can be made, but more often than not, you will lose your investment. Therefore, never use funds that you cannot afford to let go. Additionally, direct investing is meant to be supplementary to standard retirement planning, not in place of it.
7. Do you maintain a diverse portfolio? As a high-risk investment, direct investing into startups should be part of your total investment portfolio and not the entirety of it. Stick to the level of risk that works for you.
If you’re hungry to learn more about investing in the right startups, join Pyrium’s investor community and consider learning with us via our growing arsenal of online courses.
Here’s to becoming your own venture capitalist!