A sound management is like a captain of a ship. The onus of charting out the right direction in still waters and steering the company safely in troubled times lies on the management.
We would even go to the extent of saying that the way in which a management behaves, determines to a great extent, the long term success of the business. You don’t want to be an investor in a company where the management takes money from the shareholders to fill its own pockets.
A case in point here would be Satyam. It promised its investors the moon. However, they soon had to settle for sleepless nights as the ugly truth of Satyam reared its head.
2.Wait until a company’s lock-up period Is over:
A lock-up period is a when the people who already own stock in a company are not allowed to sell it. This lowers the risk of the financial backer, as well as the risk to the stockholders, to a degree.
Wait until this period is over and look at how many of the stockowners still have their stock. This is a good indication of where the company stands and can show if the business has a plausible future, helping you mitigate your risk in the situation.
If a majority of the original stockowners are holding onto their shares, it’s likely the business is finding success and showing growth. If the original stockowners are abandoning their shares, it’s probably a sign to hold off investing in the business.
3. Investor mentality:
Traders routinely buy and sell the same stocks within a time frame of a few hours. ‘Investors’, on the other hand, put money in stocks and hold on for a longer period of time, generally at least 2 to 3 years.
Develop an investor mentality. Adopt a long-term investment strategy. While looking at the quarterly results of the company, don’t lose sight of the bigger picture. Invest for a longer duration which promises more returns and is not affected by daily market fluctuations.
Research shows that the shorter the duration of investment, the more are the chances of losing money. While, with long term investing, the chances of losing money are lesser.
Remember, the longer the investment period, the greater are the chances of making money.
The golden rule to investing is considering the future growth prospects of the company you are investing in. During the dot-com boom, many investors displayed a herd mentality, investing in companies without any research. The result was the dot-com bust that followed.
It is important to not only know the company like the back of your hand but also be aware of the external factors influencing the growth of the stock. The overall state of the economy, the factors influencing political and social environment should also be considered while investing.
Sector growth, the demand supply trend and the competition in the sector also need attention before you decide to invest in a particular stock.
5.The details of due diligence:
So you come in contact with a startup, you have met the team, and they have done their 2 – minute elevator pitch. Suppose you are extremely enthusiastic about the business idea and the team, and your gut feeling says you have to invest in this startup. This is the time to take it slow. Put away your enthusiasm and look more closely at the details. Some details that you should always look at:
1. How is the cap table formalized, or are there loads of small or inactive shareholders?
2. Does the company have debts which they may not be able to repay?
3. Is there a co-founder / shareholder who is no longer active and needs to be bought-out?
4. Is there a shareholders’ agreement containing a strong anti-dilution, or liquidation preference?
5. Are all the relevant IP and URLs owned by the company? If they have IP licences: do these have a sufficient length and scope?
You may not have heard of some of these terms before: it might sound like sorcery. You can find an experienced lawyer to help you but, again, a bill might be presented. A way to prevent high costs is to go and find other angels who have dealt with the same problems before. Surround yourself with investment friends whom you can ask for help. Perhaps you can get into the habit of investing alongside them. Expanding your network is pivotal! Every company is different and every startup has their own details that you need to understand and get a good understanding about. Generally, a fast way to get information about a startup is reading their Information Memorandum. Not all startups produce an Info Memo. But if they have written one, and they had some experience/ professional help with it, then this is often a good starting point. Otherwise, you will need to collect the information yourself.
6. Your returns may come slowly:
Small businesses need all the money they can get, which is why you shouldn’t expect to see a return on your investment in the near future. More than likely you’ll have to wait a few years to see your profits come in, especially if you’re investing in an early-stage startup.
Investing is a “big picture” move. Patience is a virtue. Don’t be surprised if you don’t see any money for the first couple of years.
7. Have an exit strategy:
With any investment, there’s always the chance that things will go wrong or simply don’t work out as planned. It’s important that you have an exit strategy if things start taking a turn for the worse. Address this with the business owners before giving them funding. With every investment, you’re taking on some amount of risk but with an exit strategy, and explaining it from the get-go, you can give yourself a bit of a cushion on a somewhat risky move.