The Uber-Careem deal has definitely marked the MENA region for good and it has even left for a few investors a bittersweet aftertaste about what they missed out.
If you are reading this, it certainly means that you are interested in investing in one or more startups. And not just any startups - you might be looking for the next Careem!
So, you might already be on top of your investor game: you are attending every single startup event, you are all ears during demo days, you have built a successful network in the ecosystem, yet you still don’t have that sparkle in your eye.
And you already know that the process to finding the next startup gem takes a tremendous amount of time, patience and research. So you may be wondering how do I choose to invest in a startup? Should I be looking at stage? Revenue metrics? Industry?
The idea of investing is thrilling and intimidating at the same time. It is particularly harder for first time investors to know where to start and make savvy and profitable investments.
Before you make your next investment decision, we have made sure that the opportunity is right for your financial and personal needs. Here’s our 5 tips on how to spot and invest on your next venture. Let’s start!
1. Invest in people
If you are one of those who think that investing in the idea is more important than investing in the execution, we will prove you wrong.
About 90 percent of startups will fail, due to self-destruction rather than competition. This means that your investment might see the same tragic outcome. And the last thing you want to do as an investor is gamble!
It’s great to get excited about a fun innovative idea. But you need to ask yourself, who are the people behind those ideas?
The success of a company is highly dependant on its founders and management team. How many entrepreneurs have turned bad ideas into good businesses? In the same way, how many entrepreneurs have not been able to create anything positive from good ideas?
Every investor needs to be looking at experienced teams as it reduces the amount of risk they take while making an investment. This is exactly why entrepreneurs always take a minute out of their pitch to highlight team experience, to prove you that they can deliver on the idea.
A quick tip to invest in people is looking at the entrepreneurs who have created a business out of their own frustration. Many entrepreneurs have solved their own problems and created a business out of that. And these are the people you want to invest in because they are the ones who will work with a strong sense of passion and attachment to their product or service.
At MAGNiTT, we’ve made it easier for investors to look for exceptional founders. Through the MAGNiTT Messaging tool, investors can directly connect to founders and ask them relevant questions about their background, their attachment to their product or service, details on their management team and more.
All you need to do once you’ve identified the startup, is send a connection request and spark a conversation. You cannot even begin to imagine the gems you may discover!
2. Don’t follow the trend
It’s a common misconception that following the masses will save you from making poor investments. The only thing true about this is that you will lose your money along with the masses when things go wrong.
In the same way, you should never under no circumstances invest in a startup just because everyone else is. Instead you should bet against the masses.
Firstly, it is evident that you will have a greater feeling in being a visionary investor rather than an investor whose investment decisions rely on the crowd. But you should also know that if everyone starts investing in the same companies, it will become more difficult to generate superior returns.
This is exactly where you need to take time on a regular basis to do your own market research and industry digging to be on top of your investor game.
At MAGNiTT, we have made this exhaustive paperwork exercise an enjoyable and seamless online experience which you can do anytime from your laptop or mobile. Through our Analytics tools you can easily download and export charts and tables and make more secure investment decisions.
The power of the Analytics tools lies in its unique and up-to-date data, which is reviewed every day and renewed every month by a team of dedicated analysts.
3. Diversify your portfolio
We’ve made it clear already that investing in startups can be risky. You can win big or lose it all. Just like you don’t want to constantly bet on the same horse, you need to accept that diversifying your portfolio of startups is crucial if you wish to increase chances of success or decrease chances of losing.
The whole point behind diversifying your portfolio is that you get to at least walk away with some money in your pocket instead. Another reason often overlooked in diversifying your portfolio of companies is that you get to add another string to your bow and therefore not limit your practical knowledge to a single industry.
We recommend you to use our Startup directory at MAGNiTT to get an understanding of the key companies making up each industry in the MENA region. Our directories of startups, investors and people are free to use and helps you as an investor, get ground knowledge on which investors have been investing in which startups.
This way you can easily assess which investors have diversified or non-diversified portfolios and what has been working best for them. You may want to upgrade to a MAGNiTT Intro account to use multiple filters for your directory searches.
4. Focus on startups with recurring revenue
More venture capital and private equity managers are moving away from subscription-model companies to high-growth software-as-a-service companies because of the increasingly high costs of the former model and the lack of certainty that a recurring fee guarantees success.
“Any firm with recurring revenue is extremely attractive to investors”, declared Rohit Kulkarni, Head of Research at SharesPost Inc.
According to the Oregon report, SaaS companies are getting more attention from investors because they are considered as companies with high recurring revenues as well as high customer retention. Reason being that SaaS companies license their software instead of the traditional way of selling it to customers.
Unlike the traditional software distribution model, SaaS provides customers with many benefits including but not limited to: it can be used everywhere, including on mobile, it has easy integration with plug-ins and add-ons, it reduces piracy, there are no packaging or distribution costs and the software is always up-to-date.
The recurring-revenue model is a key feature of SaaS companies which is why it became a top investment target for venture capital and private equity managers.
Golub Capital LLC’s Managing Director Peter Fair said, “SaaS is a more predictable and reliable revenue stream than if you had to go out and sell the software - the perpetual license model”.
Finally investors love the SaaS model are that the cost of servicing each customer goes down, therefore it helps lead to a more predictable cash flow.
5. Research how they see the future
It’s important to be as prepared for future outcomes - good or bad.
You need to dig in even deeper to understand what the 10-year goal of the founder is. It may be that the founder will get bored after a while others may want to scale their startup for 10 years. It is your role to investigate as much as possible to avoid a founder exit that will disrupt the business.
Another investigation you must conduct is to understand how they’ve used past funds in the past and how they intend to use the future ones. This will give you a better sense of the entrepreneur’s vision and character.
Additionally you may want to research how much the founder intends to pay himself/herself.
All in all, you need to be able to understand if the amount raised by the company will be used to accomplish important milestones to help the company or either to raised another round of financing.
You may wonder how will I know the answer to these questions, especially at an early stage? This is exactly why we put in place MAGNiTT Messaging - to help you as an investor vet founders and ask them those tricky yet crucial questions.
You can also welcome their one liners and use this opportunity to ask for their future plans or any other details necessary to your investment and which you can’t access publicly online.
The power of MAGNiTT messaging is that you can get the information directly from the source - the founder - and anytime from anywhere.