AlleyWatch: 6 Reasons Entrepreneurs Should Invest in Other Startups
Entrepreneurs are competitive by nature — it’s a trait we need to survive. But that doesn’t mean you shouldn’t look to form strategic partnerships with other entrepreneurs. In fact, a startup in a separate industry should be seen as an ally and a potential investment.
Investing doesn’t always mean contributing large sums of cash. That may not be possible, especially if you run a small business. Investing can include purchasing or pre-ordering a product, making introductions to key people, and offering advice or expertise.
There are many compelling reasons to invest in other startups, but here are a few to get you started.
1. You’re a Highly Qualified Investor
Since you know from experience what it takes to be a successful entrepreneur, you can use your understanding of early-stage companies and capital investments to leverage risk and identify opportunities for a higher ROI. By lending a hand, you may be able to improve a startup’s chance of success.
2. You Warm the Waters for Other Investors
Because you’re more likely to recognize and encourage a startup that ends up succeeding, you can improve the investment statistics. Investing is risky, and no one knows it more than investors. Research shows that three out of four startups fail, and a 2013 Worthworm study showed almost 50% of all angel investors regretted their investments.
Statistics like these keep investor cash on the sidelines and make it harder for young companies to get the capital they desperately need. The more entrepreneurs invest in other startups, the better the success rate will be. The higher the success rate, the more investors we’ll attract — and that’s good for everyone.
3. What Goes Around Comes Around
Entrepreneurs are as loyal as they are competitive, and when you help one out, he or she is likely to return the favor. Most are well-connected people with the ability to open doors to your next big customer, partner, or investor. The more you work with other entrepreneurs, the more resources you’ll have to share.
4. Your Investment Could Be a Startup’s Savior
The best and brightest entrepreneurs aren’t always the ones who succeed. Along with skill and hard work, luck often plays an important role. Your investment might be the stroke of luck a startup needs to make it through a critically tough time. Take Tony Hsieh: He pushed through near bankruptcy to turn Zappos into a billion-dollar company. Now, Hsieh is revitalizing Las Vegas and turning it into a startup utopia.
5. Your Investment Helps Build the Economy
Startups are key to revitalizing our economy. The more startups work together to help each other succeed, the more jobs we’ll create. And as startup jobs become increasingly vital to our economy, we’ll see more startup-friendly programs and policies enacted. The Startup America Partnership and the JOBS Act have helped our industry, but there are still many more improvements needed to make our country startup-friendly.
6. A Lot of Smart Entrepreneurs Do It
Follow the wisdom of the crowd. Dave McClure of 500 Startups invests in businesses in exchange for equity through capital, mentorship, office space, and more. Path co-founder and CEO Dave Morin has invested in startups such as SocialRadar and Crowdtilt. And, of course, AOL co-founder Steve Case has invested in numerous startups, including LivingSocial, Zipcar, and BigCommerce. These successful entrepreneurs see the opportunity and the importance of investing in other startups, and you should, too.
Investing in startups is not a job for bleeding hearts. Losing money or other resources on your investment doesn’t make you a more philanthropic person. Investing in fellow entrepreneurs requires the same business savvy that banks or venture capitalists employ to ensure a good ROI. Before you invest in another entrepreneur’s vision, carefully evaluate the viability of the startup. Here are three tips to guide your investments:
1. Find people you believe in. Only invest in a startup with founders you really believe in — people who are trustworthy, highly qualified, focused, and determined to succeed. Even if this venture fails, entrepreneurs like these are likely to succeed in other enterprises, and they’ll remember that you were there to support them.
2. Seek a good match. Look for a compatible startup that will maximize your investment and provide value to both your company and theirs. It’s wise to allocate your resources to those enterprises where you can provide value beyond the initial investment. You’re looking for a startup where your special expertise, connections, and resources will have the biggest impact.
3. Seek a customized ROI. It’s up to you to determine how you’ll receive returns on your investment. How might the entrepreneur or startup you’re investing in help you and your business in the future? Is there potential for your companies to work together? Do the founders have relationships with contacts that could help your business? What other opportunities for ROI are there? Invest in those startups that offer a return that appeals to you.
Investing in fellow entrepreneurs and startups just makes sense. Instead of going after the whole pie, let’s share it. There’s enough to go around, and it gets bigger the more we divvy it up.
Curious about how much your venture could be worth? Or how to maximize your business? Or are you trying to do due diligence on potential investment deals? Or even looking for a world-class instruction tool? Then try a subscription to Worthworm, and let us help you.