Tips for professionalizing alternative investment
As we have said many times in Fellow Funders, we want to bring investment in startups to individual investors, but always from a profesional point of view and with the rates of quality traditionally used by the greatest investors.
Taking advantage of the fact that we are in these special dates, and that many of us are used to make a small balance of how the year has developed, we want to share with you a series of tips on what we should value when investing in startups. Although there are many aspects to consider (we have been commenting on them in successive newsletters we have been sending you), several aspects seem to us to be the most significant:
- Understand the business model in which you are going to invest. Comprehend the business model of the startup in which you plan to invest, analyze its risks, consider the scenarios in which your investment enters the risk comfort zone. In short, if you have decided to invest, do it wisely. “A maximum that has always guided my investments has always been not to invest in what I do not know or do not understand…” Rene de Jong.
- Analyze if the human team is in line with the business model of the startup in which you plan to invest. The team is always important in a company, but in an incipient and unconsolidated business it is of vital importance. Not all models have the same needs and assessing the adequacy of the team is a differential factor that can facilitate the success of the company. A basic aspect is the personality of the CEO and his or her ability to direct and bring together everyone´s efforts. “In every startup there must be a leader who transcends the sum of the parts… In the end, it is the leader who must decide, make the decisions and the team must execute…” Eduardo Diez-Hochleitner
- Verify that you have all the information you need to evaluate the possibility of investing. Check that you have been provided with the company´s accounts, that the company is up to date with its obligations and that it has adequately protected its intelectual property. Analyze the existence and the content of the Partners´ Agreement. It is of vital importance to know the rules of the game (relations between partners, majority rules, accompanying,exit clauses …).
- Know how you will be able to recover your investment. It is important that we understand how we will be able to “monetize” our investment. We can obtain profitability by the purchase of our shares by another major investor, by the collection of dividends, … We must evaluate if the project in which we want to invest adapts to our risk profile and has a time horizon of possible recovery of the investment that fits our needs. “We should not always think that our Exit as an investor should be through an IPO. Why not exit with the entry of Secondary Funds or with funds obtained with Financial Debt of the company to repurchase shares …?”. Tobias Schimer.
Finally, we would like to mention two aspects that we consider fundamental:
- The need to use professional criteria to define our investment. If you do not have enough time and/or knowledge to manage your investments directly, rely on professionals who can help you and accompany you, always providing professional criteria and with the utmost transparency and security. “I always invest by intuition, but intuition is not intuition, intuition is a combination of knowledge and acquired experience…”. Eduardo Diez-Hochleitner.
- The need to diversify our investments in order to reduce risks and optimize our portfolio to maximize profitability. We must build an investment portfolio with a sufficient number of companies, diversifying in sectors of activity, business models, maturity periods… Adequate diversification is the fundamental factor that will allow us to significantly reduce the expected losses of our portfolio. “To invest, two of the most important aspects are to diversify and not to fall in love with your investments…”. Tomás Guillén.
At Fellow Funders we want to share with entrepreneurs and investors the importance of alternative investment, and more specifically Equity Crowdfunding, a basic instrument, in our opinion, for the development and consolidation of the innovation fabric in Spain. However, in Fellow Funders we want to respect at all times what we have called Fellow Funders commitments (trust, transparency, thoroughness and monitoring), the very reason for being of our company.
Finally, and as we always remind you, at Fellow Funders we continue to believe that investing in Equity Crowdfunding is an interesting alternative, but always keeping in mind the need for portfolio diversification and the risks assumed.
Do you want to join the Fellow Funders world? We are waiting for you!