Here at Data40, we work with all kinds of investors and varying budget sizes. The requests we receive, however, are often quite similar. That is why we decided to put together an extensive guide for becoming a successful investor. In this article, we will analyze the most commonly asked questions, provide answers, and tell you what can be done to help, as well as why you can rely on our assistance. Read on for useful facts, interesting details, frequent problems, and helpful advice.
Point 1: Understand the Risks
The main thing you should know about venture capital investment is that most new companies go bust. According to statistics, 90 out of 100 newly created startups will not survive, proving how risky this line of work can be. However, by investing as an early-stage venture capitalist, you can get a very large return on even a single company, which will more than pay up for any losses. Reduce the risks by approaching every individual case wisely and analyzing in advance. There are a number of “rakes,” which newcomers constantly step on, leading them to burnout. Knowing about these, you can somewhat mitigate the risks or at least better understand them.
First thing first: make sure you understand why you want to invest. If your goal is to make money, then you should weigh in on all the considerable risks of losing funds instead. Remember that when the risks are high, there also lies extremely high profitability in case of success. If you are investing for fun or if you are aware of the risks and are going to invest free capital that you are unafraid to lose — then that is a different story. Our advice here is:
- Look at your liquid capital (cash and other assets), subtract your costs of living, and invest 15% of the remaining amount in venture capital investments;
- Your expected return should be at least 15% per annum, because that is about as much (or at most) you can earn on less risky instruments of organized exchange;
- Do not compare that return to the business you run or work in — for venture capital projects, your risk-weighted return is the limit anyway;
- You must understand that venture capital is not a liquid asset. Get ready to wait a long while. Better yet, prepare to actively help the company grow and solve problems, of which, believe me, there will be many;
- No matter how hard this may be, be prepared to catch that moment when you will have to stop yourself and just let the startup die if you see that there is no more chance of success.
Point 2: Choose the Right Investment Target
A good investor is constantly working on maintaining a spotless reputation. Building a good brand requires one to be helpful towards their community. Helping both the companies you have invested in and even those you failed to invest in, will allow you to forge a network of connections and become a frequent subject of discussion. The best in the business may then come to you for money, in the hope that you can help like you did the others thanks to your expertise just as much, if not more, than your investment. But how does one choose the best option is such a flood of offers?
Try to invest with experienced people, those who already understand the topic or have a track record of working with other successful projects. Talk to the team. Consider as many projects as possible, without delving too deep into the first one that comes along. Try to rely on facts, figures, and dry calculation. Do not give in to local mentality or beliefs and make substantive predictions. Beware of falling victim to FOMO (fear of missing out) — startups often attempt to feed into this fear with their presentations. In doing so, they try to create an image of the future you want to believe by hiring experts marketers and hype maestros, all to instil a fear that you will miss out on the next big thing. You must learn to shove such emotional manipulation aside.
The company you choose must have a clear plan going forward. Its every step and every action must be scheduled in advance, with clear goals to achieve and an unambiguous plan to achieve the projected results. This plan must also have a place for your investment and shared expertise. The future is not just trial and error, but a clear, highly detailed set of algorithms that must be adhered to.
Still, when choosing a project for investment, one should do their own research in addition to the data presented by the team itself. We have already written a lot on how a venture capitalist makes decisions. Here are a few key pointers to keep in mind: devise your investment strategy, stick to it, be careful, do not make hasty decisions, evaluate the odds, and only commit to a choice strictly based on investment decisions you made earlier. If you suddenly feel like investing more than you planned, remember not to be tempted by emotions and stick to the plan. Chances are there will be many such temptations going forward.
Also, as a team of analysts, we can give the following recommendations when choosing an investment target:
1. Request or conduct a detailed research of the potential target’s portfolio, as well as acting and former top management to see if their experience corresponds to what they claim;
2. Find out if the projects or games they claim to have worked on were actually implemented with any degree of success;
3. Check what partners the company has;
4. See how their contracts and legals are structured;
5. Learn whether the IP’s about the developed products are accepted;
6. Determine whether they hold any licenses and sublicenses;
7. Discover what their positioning is;
8. Gather data about the competitors of the future product;
9. Try to figure out all the relevant market trends.
This kind of research can be carried out on your own, but it is worth weighing in on other options. Many agree that it is easier to order such services from professional teams, saving your time and allowing you to focus on other tasks. We, for example, have such a service available here: [LINK]
Point 3: Recognize Your Weaknesses and Work on Them
Investment is the placement of capital for the purpose of making a profit. If a project is ultimately unprofitable, the investment may be lost in whole or in part. Investments are risky, but you can simplify the process by preparing a competent contract on interesting terms or choosing the best investment options by studying the market. Our clients often have a lot of questions about how to minimize the risks, how to analyze the market, how to find out the key market players in a certain field before investing, etc.
You can do the research yourself via various open sources and analytical tools that allow you to see to what extent the project’s content you are going to invest into coincides with that offered by the competition. It will be very fruitful for your research to behave like a customer of your competitor, monitor social media activity, and evaluate theirs product and service. Competitive research should reveal signals, such as whether all the competitors have some kind of chip, or have a serious pros and cons to their current business models. You need to influence the product, understand where the company can deploy it next, how to best develop it and why. This will teach you how to better interact with future customers and online subscribers. We answer questions on Venture Capital (Competitor Research Survey) as a field where market research, identifying customers needs, and following the current trends are massive tasks. It is important not to miss anything, as it will dramatically increase the transparency of every process. Now, let us break down the major issues and make points based on our experience and that of our clients. Faced with the same questions from several customers, we are aware of the most popular problems and how they can be solved.
Typical research types that we conduct include:
- Compiling a complete list of competitors for the client’s product or service;
- Identifying key criteria for comparing offers on the given market;
- Defining top competitors, newest competitors, and comparable competitors;
- Comparing the client’s product with those offered by the competition, identifying strengths and weaknesses, formulating proposals for improving the product based on research and identified strengths;
- Preparing comprehensive log reports on the competitor’s product performance with screenshots and detailed feature descriptions;
- Collecting and analyzing competitors’ creatives and publications;
- Finding answers to open-ended questions about market trends and features offered by similar products.
The level of detail of each particular comparison depends on study goals. For example, when studying competitors, data can be collected in a variety of ways:
- Simple analysis and database and search results tabulation;
- Brief, one-page background summary for each individual competitor, based on information acquired via online sources;
- Detailed product study resulting in our own conclusions about its features and quality;
- Expert interviews covering all aspects and features of the selected product.
The research may also include:
- Conducting a digital panel survey;
- Gathering expert opinions and consensus predictions;
- Compiling competitor activity digests (SMM, marketing campaigns, product feature changes).
Investors constantly strive to remain competitive and in demand. To this end, one needs to know their disadvantages and work on mitigating or completely bypassing them, which can be done, among other things, by gathering quality feedback from customers. You can learn your investor pros and cons by studying the market, your competitors in the same field, understanding who are the clear leaders, identifying newcomers, what they offer or try to introduce, what traits are emphasized, what are the current standards, what is missing, and why. Only then it becomes possible to evaluate your product objectively and completely, to understand what place it has in the market, whether it meets all the required criteria, and to change the product or build your USP-based positioning (Unique Selling Points), working out the negatives. This is all based on a study of the market and competition. Our team analyzes user feedback in the customer sphere, collecting feedback about competitors and their customers, identifying common problems, dissatisfactions, wishes, and structuring issues. There are a number of ways to go about it: research can be performed on your own, vi special software, or by appealing to specialized companies. You can read more about such services provided by our company here: (Feedback research).
The main thing here is to understand what suits you and calculate how you will make a profit or how much you can lose. There are a lot of risks and problems leading to failures because people do not understand where their product is, who the competitors are, which is stronger, and so on. It is therefore important to feel the market, know your competitors, learn the opinions and pains of the customers. That is where our two services come in: market/competitor and customer feedback analysis of both the client’s and competitors’ products.
Point 4: Get the Investment (Venture) Deal Right
There are not too many ways to do investment deals and currently there are only two main ones: private equity deals and convertible loans.
The latter is, in fact, a variation of the first method, at least if we speak of investment, rather than the borrowing side of this tool.
Besides those specified above, introducing investment into a company sale of a treasury share is also used. However, by virtue of the fact that company treasury shares are a rare phenomenon, this method is also seldom applied, even though it is rather convenient in terms of registration.
The entire process of venture capital transaction execution can be divided into the following major steps:
- First, the investor learns about the project and conducts preliminary research, looking at the niche, the market, the product, and the competitors, evaluating these things based on experience, etc. All to understand whether the potential investment target even warrants getting involved.
- Upon “shaking hands,” the investor and the startup begin discussing investment deal terms. Sometimes the investor gets acquainted with the project and provides positive feedback to its representatives in case of interest, then the parties start the negotiations. Sometimes the investor initiates contact themselves, but this usually happens at a later stage, when the project has already proven itself somehow.
- The investment deal documents are getting drafted and amended. Draft investment transaction documents are often prepared on the side of the investor and are presented to the startup for review and possible corrections. This is a very important stage wherein all the actions should be entered and documented. What went smoothly, what ended in failure, whether the project took the money without acting as they should, whether they got into debt, and practically anything else — all things should be documented, in order to reduce the gray areas and make the entire scenario as transparent as possible. Both parties can add clauses to the contract, so that neither side feels like the other does not offer enough guarantees. The vast majority of investment deals are structured on the model of the investor’s entry into the company through an increase in share capital or on the convertible loan model (although the convertible loan is a variation of the former method).
The documents required for the execution of a venture capital transaction are:
- Articles of Incorporation;
- New charter (or amendments thereto);
- Corporate agreement;
- General participants meeting protocol (decision of the sole participant);
- Investment Treaty.
These services are often ordered on the side, from those who can do it quickly and highlight the necessary information. Data40 also deals with this and has extensive experience and expertise to offer.