Beginners Guide to Investing in Israeli Startups and Business Ventures
In the past, if someone had told you that one day you could invest in a variety of startups from your living room, at the press of a button, you probably would not have believed it. A number of events that have taken place in recent years, including technological developments and legislative changes, have made this a reality, and now anyone can share in the success of the Start-Up Nation. Here are some important rules to guide and help you make the right investment
Online investment platforms have been operating around the world since 2013, allowing the public to invest in a variety of startups and ventures. Today, these investments have become routine, with over $ 4.6 billion invested over the last year by more than one million private investors worldwide. Among the success stories is British company Revolut, which raised one million pounds through the Crowdcube platform, and within a few years, reached an incredible value of over $ 1 billion, giving investors a staggering 1,900% return on their investment. Success stories such as these can be found here as well: Israeli company HeraMed, which raised $ 560,000 on the ExitValley platform, launched an IPO less than a year later on the Australian ASX stock exchange, and gave their investors a 260% return.
These success stories are becoming more and more common, and Internet investment platforms have become the preferred fundraising alternative for companies in early investment stages. However, it is important to remember that venture capital investments are not simple and require knowledge and experience. Whether this is your first investment or whether you have past experience, here are some principles and rules to follow when investing:
1. Investment diversification will increase your chances of success
The first and most important principle is that of diversification. Investment diversification is about risk exposure in a given investment, and in seeking to minimize that risk as much as possible. For example, an investment portfolio built entirely on shares of US listed companies will be significantly affected by shocks in the US market. In contrast, a portfolio that consists of investments from a number of different sources, such as stocks, bonds and real estate, will be more resistant to fluctuation in the market and unexpected events.
The same goes when investing through an online platform: you should spread risk by investing small sums in several companies from different fields, and even in different industries (eg technology, real estate and small businesses). This way, you will significantly increase the likelihood of proper returns.
2. Take a close look at the entrepreneurs and the team
A good idea is only the first step, and behind every successful venture stands an excellent team. When considering a potential investment, you need to take a deep look at the company's team, and especially the entrepreneurs who head it. Ensure that the team holds the best skills required for the specific startup, including technical knowledge, business background, expertise in the startup's operations and relevant marketing capabilities for the specific market. Examine the experience of the team members - whether they have been successful in the past; what is their level of commitment; will they weather the storms or give up when things get difficult; will they be determined and do what is necessary to succeed; and most importantly - do they know what they are doing - do they have a vision. These issues should be examined directly with the company's entrepreneurs.
Today, you have a variety of ways to directly communicate with the entrepreneur, through the various investment platforms - starting with a telephone conversation, attending a webinar, attending a periodic investor conference (some of the platforms hold such conferences regularly), and even setting up a personal meeting with the entrepreneur.
3. The best feedback comes from the crowd
One of the significant principles of internet investment platforms is that of "investing together". This principle allows you to examine potential investments by seeing how the platforms' investor community responds to a campaign - whether it trusts the fundraising company or not. In addition, you can see who has chosen to invest, how much they have invested and what the rate of investment progress is. For you, the investor, this is an ideal situation - you are not alone. You can enter into an investment in a controlled manner, when you have the right indicators to do so. For example: when there are more than 25 investors in the campaign, when the fundraising target reaches 75%, when a specific investor you know and trust is investing in the company, or when the campaign has 5 days left and has reached its campaign goals already. It is the wisdom of the masses at its best, and there is no substitute for that.
4. Analyze your investment according to predefined parameters
In order to make the best investment decision for you, we recommend putting each investment through a rigorous review process that examines the following areas: the company's business potential; technology and uniqueness relative to competitors; market potential; business environment; achievements; financial results; liabilities and revenue potential.
5. Look for quality seals
Startups that have come a long way and have been able to reach significant milestones will usually receive "quality stamps" such as: venture capital or accredited angel investment, various grants from the Innovation Authority, strategic collaborations with leading companies, a rich and professional board of directors, various regulatory approvals and more. Investing in a company with a quality seal means that someone serious and professional has already examined the company and decided to approve it, which makes the investment more stable and lucrative for you.
6. Read and understand the details of the transaction
As part of the investment analysis process, the terms of the deal must be examined: The company's value in relation to what is acceptable; the target fundraising amount; the minimum investment amount and whether it fits your budget; the type of transaction - whether it is an investment or a conversion loan; whether the shares are held directly or through a trust fund; the type of shares; and the mechanisms used in the investment agreement and the articles of association.
7. Consider the liquidity and exit strategy
If you buy shares of a company that trades on one of the US stock exchanges, the process of selling the shares and "meeting the money" will be relatively easy. Investing in a private company is different, because the shares are not liquid. After investing in a private company, you need to calculate your exit route and how you can "meet your money". Every company has its own exit strategy: from building a company with significant revenue, through selling the company and even launching an IPO. Today there is another new way to meet the money – selling shares through the secondary market. Some of the investment platforms have developed a trading arena for shares of private companies, so investors can sell their shares and get a return on their money without the long-awaited company exit.
8. Investing right
As mentioned, investments in startups, small businesses and real estate ventures are not a simple matter. When considering an investment, one must first examine the investment mechanism itself and the added value of the investment platform through which you have chosen to invest: What are the nature of the companies coming to the platform; how the legal examination of the fundraising companies is conducted; whether there are uniform investment contracts that guarantee investors' rights; whether the shares are liquid and there is a secondary market that allows them to be sold; whether it cooperates with leading investment bodies, such as incubators and VCs; whether it works alongside the Israel Innovations Authority and encourages preferred investment terms under the Angels Law; do they allow you to consult with other investors or have direct contact with the entrepreneurs and more.
* Everything written in this article is the author's opinion only, and does not constitute and cannot be a substitute for legal advice, nor does it constitute investing advice.