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5 Tips for Investing Safely in Startups

From defining the entry and exit strategy, knowing the risks or protecting against the entry of future investors.

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Investments in startups are continuously growing in Spain. More and more private investors or business angels are betting to diversify supporting emerging companies. But what do you have to take into account before investing in a startup? How much do you have to invest and how to know? According to Metricson, a legal services firm specialized in comprehensive legal advice to technological and innovative businesses, it is very important to consider several factors before investing.

Luis Gos├ílbez, managing partner of Metricson, says that, in the first place, it is necessary to know how much money and how many companies are willing to invest to minimize the risk and maximize the return. “This means to be clear from the beginning if you are going to diversify or you are going to bet on a specific type of business or sector, it is very important to establish a scale and respect it, there are investors who always put between 2 and 5 thousand euros and do dozens of investments per year, others prefer to invest from 15,000 or 30,000 and only make a couple. “

In addition, argues this expert, we must take into account the maximum valuation of the company in which it is going to invest:

“If we know the sector well, it will be easier to find out if the company proposes a reasonable valuation or not, and in that case , we can decide what contribution we can make, within our margin. If not, it is best to let a third party in whom we trust carry out the analysis and due diligence, and co-invest with him.”

In fact, according to this expert, “a business angel usually does not lead the rounds, but co-operates with third parties, as a follower of a lead investor or as part of an investment union in which the other investors act jointly. In addition, having a more limited economic capacity than a professional fund or investor, usually does not go to later rounds, but invests at the beginning and then dilutes or sells its participation when the company has a higher valuation.

Metricson offers 5 recommendations that must be taken into account before investing in a startup:

1. DEFINE THE ENTRY AND DEPARTURE STRATEGY

“You have to take into account what type of companies you are going to invest in, the maximum amount of each investment, what you are going to ask for in return and what you expect to achieve, and keeping track of the investments will minimize the risks. It has experience in the sector, it can help the investees to grow more quickly and avoid basic errors, but we must make clear the dedication from the beginning so as not to generate undue expectations “.

2. RESERVE FUNDS TO GO TO LATER ROUNDS

“If the investor dilutes too early in the most interesting companies in his portfolio, he will lose the advantage associated with having entered into initial phases and, therefore, of greater risk.”

3. PROTECT THE RIGHTS OF ‘BUSINESS ANGEL’ AGAINST THE ENTRY OF FUTURE INVESTORS

“The actions of the investor should have the same rights associated with the investors that enter later.You do not have to accept clauses that limit or impair your rights to your benefit, such as preferential liquidation.”

4. BE AWARE OF THE RISKS

“A startup in its initial phases is an extremely risky investment, so you should only invest money that you are willing to lose and diversify as much as possible.” The main challenges of a business angel are related to the permanence of the founding team. teams change drastically during the first years of a company’s life, which causes problems of continuity, situations of mismanagement and partners leaving the company, taking significant packages of shares .Therefore, business angels must help teams to create a pact of partners that shield their continuity and avoid conflicts that can end the company “.

5. CHOOSE THE TRAVEL COMPANIONS

“If you do not have experience investing, it is advisable to join a network of business angels, a crowdfunding platform or a pledge fund.” They are in charge of managing the deal flow, selecting interesting projects, negotiating the terms of the investment and representing the business angels in front of the rest of partners and investors”.

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