Should I invest in my friend's startup?

Your friend is setting up a really cool tech business. He is raising some money and offered you the opportunity to become one of the first backers. This may sound very exciting … but don’t blindly accept his proposition. The first thing you need to do is determine your investment goals. Are you investing money that you don’t need? What is the return you are expecting? The key rule here is: don’t invest money you can’t afford to lose.

Here are some other key basic rules to follow when investing in startups:

 

Review the business plan

To evaluate a private investment opportunity, you must see a written business plan. It can be a pitch, a memo or a presentation, and generally, it should include the following information:

  • business description
  • industry overview
  • founding/management team
  • financial plan (current and projected performance)
  • exit strategy (how will you make money?)

Following your review of the documents provided by the company, make sure you also perform your own due diligence (competition, team, market ...)

 

Meet the founding/management team

How important is the founding/management team? Very! Launching a business is hard work. Founders will be 100% committed to their businesses and do all it takes to make things happen and get the work done. We hear people having great business ideas all the time, but the most important thing is execution.

You may want to check if you have shared connections on LinkedIn and ask for recommendations. Meeting management is also a great way to get a better understanding of their commitment and motivation.

 

Learn how to evaluate businesses

To see how investors do it, I would recommend browsing through the investment opportunities on crowdfunding platforms. You can easily register on Crowdcube and Seedrs and have access to information on businesses, see the comments and questions and answers on the forums.

 

Determine how much you want to invest

How much you can invest is also unfortunately how much you can afford to lose. On crowdfunding platforms, such as Crowdcube, you can invest as little as £10.

In the first fundraising “round” (angel investing), founders generally raise between £150k to £500k from a syndicate (a group) of angel investors. You may then be able to invest as little as £2,000, but generally the ask is between £5,000 and £10,000.

 

Benefit from tax advantages

In the UK, the government has implemented two very advantageous tax breaks when it comes to investing into small, high-risk businesses. Make sure your investment actually qualifies for it!

The schemes are called Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS). Depending on which scheme the company has registered for, you will automatically get a reduction (from 30% to 50%) in your tax bill when investing plus some advantages when selling your shares.

 

Document everything

Don’t just wire the money and rely on promises or trust. Document everything and keep copies in your files.

 

Working with a friend

You should assess the risks of going into business or working with a friend. We all like to think that going into business with a friend would be great fun, but it can make or break a relationship if investments don’t work out well!

 

And finally ...  be prepared to be in it for the long-run

Angel investing is very risky – you may well lose it all! But you will also have the opportunity to make a lot of money. In any case, be prepared to be in it for the long-run, generally three to eight years, perhaps more ...

Photos credit: Unsplash - Joel Beukelman.