What You Need To Know Before Startup Investing

Early-stage startups operate similarly to other companies, although usually with much smaller teams. On a high level, a group of people is working cohesively to create something that people will buy. However, there's one significant difference: traditional companies copy what has been done before, while startup companies create an entirely new template. This is what makes them exciting; they are building innovative technologies, and venture capitalists look exactly for these types of investments. 

Amazon notoriously started by selling books. But they focused on online sales, while traditional stores used brick-and-mortar locations. At this time, there was no successful formula for marketing, selling, and distributing online products. Amazon disrupted an industry and experienced a period of explosive high growth after. They helped write the playbook used by countless online stores today.

Another difference with early-stage startup companies is their intense priority on execution speed and explosive growth metrics. A common saying in the startup world is "move fast and break things," representing the mindset of quick launch cycles and rapid iterations to achieve the glorified stage of "Product Market Fit."

It's common for startups to launch their product in phases, starting with an elementary version, often called an MVP or Minimum Viable Product. This version goes through multiple user testing until it's ready to be introduced to the market.

Pre-IPO: The Funding Stages

Startups are funded through multiple avenues and often through multiple funding rounds, mainly from venture capital firms. Here are some standard terms relating to startup fundraising:

Bootstrapping is usually the earliest or first stage the earliest or first stages of a company where the founder or team invests in the business. In this stage, things are usually messy, requiring intense grit and creativity to survive.

Pre-seed or Seed round is   usually the first round of institutional funding for a startup provided by angel investors and venture capitalists. Generally, at the seed funding stage, startups start to show some promising signs of traction and are raising to accelerate the growth of product or marketing efforts.

Series A, B, C, D, and beyond rounds are the later rounds of funding where a startup is usually evaluated based on its financials or other metrics. Usually, at this stage, the startup has launched in the market and is raising money to accelerate customer or user growth. Angel investors and other early investors could exit in these rounds, late stage venture capitalists usually want "cleaner" captables at these stages. 

An initial public offering (IPO) is when a startup lists on a public stock exchange. This is often considered an exit for the founding team, early employees, and early venture capital investors as their shares become liquid and can hopefully be sold at a reasonable markup.

3 Factors that Make a Startup Successful

Startups are risky for everyone involved; the founders, early employees, and venture capital investors. Most startups fail, but every so often, a startup that succeeds massively becomes another romanticized silicon valley success story.

Some factors that can determine startup success include:

1 . Team: it's a common saying that ideas are worth nothing; execution is everything. Especially at the early stages, the startup founding teamis considered an essential factor as potential early venture capital investors often ask themselves: "Can this team execute?".

2 . Why now: there are a lot of outside factors to startup success, including why now is the perfect time to introduce your company to the world. Before Uber, a handful of startups tried to launch a similar concept, but the world was not yet ready to enter strangers' cars willingly, and they failed. Uber launched at the perfect time when we started putting trust in digital interactions and safety.

3. Market size: even if the team can execute and the timing is perfect, the startup will ultimately be worth little if they are in a small market. Analyzing market sizes is a common investment strategy to ensure that even if the startup wins, the market is worth enough to obtain good returns for venture capital firms.

The Current Regulatory Landscape

Despite the risk, startups provide exciting opportunities for investors. Unfortunately, due to regulations, startup investing isn't widely available for the everyday person. Currently, it is mainly limited to venture capital firms or accredited individuals. In plain terms, being accredited means you have to make over $200,000 in annual income or have a net worth of above $1 million, excluding the value of your primary residence.

There have been new regulations that allow non-accredited investors to access venture capital investing, although, most times, it comes with restrictions on investor activities such as investment maximums.

aVenture is building a platform allowing private and public investors toinvest in startups through venture capital funds. Find out more on how to become a venture investor on our website.