Investment Guide in Startup Companies

The person who wants to invest in start-up companies wants to invest in the future. He’s different from the widow or orphan who invests in bonds or utilities, the retiree who invests for dividends, or the gold bug who invests in mining companies. But due to the nature of the start-up company, he has the most in common with the latter: both want to find the hidden value where others see only barren ground.

Startup companies are usually small companies and usually new companies. They are unproven, frequently having little money and less market share. Often they are started on a shoestring and a dream, a song and a prayer--but you want to find them before they become a household name.

The ABCs of IPOs: Investment Strategies and Tactics for New Issue Securities by Robert Anthony Chechile Explains the factors that can signal whether an offering will be successful by describing: Typical IPO market price behavior, as illustrated by various IPO offerings Securities regulations and the environment that necessitated their enactment Different securities markets, including the stock exchange and the multi-tiered, over-the-counter markets The underwriting process and the information required in the prospectus Evaluation techniques, including how to read a financial report and also how to determine a security’s intrinsic value How to allocate investment capital to avoid gambler’s remorse Selection guidelines for IPOs, limited partnerships, and convertibles

There is a world of difference between investing in startup companies and investing in the stock market, and the main difference lies in where your money goes. When you buy a stock in the stock market, your money usually goes to another individual: the person who owned the stock before you. But when you invest in a startup, you're investing directly into the company, buying newly issued stock that no one has owned before. So to invest in startups, you've got to find companies that are issuing stock directly into the market to raise money.

The first place to look is your full-service broker, and if you don’t have one, it’s time to get one. You don’t have to do all your trades with him, but you must have a relationship with a broker who brings these companies to market. Why? It’s simple: your broker provides a service to the company by selling newly-issued stock to their own customers through a private placement, and you can’t get in on a private placement unless you are a customer.

But since hundreds of companies go public every year, you can’t be in on all of them. So how do you choose which ones you want to be in on? Your choices will be limited, at least at first, by those companies that work through your broker, but you should tell your broker what kinds of deals you’re interested in. Let him know what you want.

Do you like exploration stocks? Biotech? Oil and Gas? Talk to your broker, let him know that you’re interested, and find out what he offers, and pay your commissions. It’s been said that it takes money to make money, and your broker needs to make money from you before he’ll make money for you.

But your broker is only half the equation. You also need to become an expert in whatever it is you want to invest in. You need to understand the business, because only in knowing what the company is trying to accomplish can you determine whether an investment is right for you. You must rely on your broker for access, but it's best to rely on your own research to decide if a company is worthy of your investment.

But when all that’s said and done, you’re still paying retail. Yes, you’re first in line, but you’re still paying close to market prices for stock. Maybe it will go up--maybe not. But isn’t there a better way to get in on startups than hoping your broker brings you a winner? Yes, there is, and that way is by already being on the inside when it goes public.

I mentioned above that startups often have no money and no market. That means they often need accounting services, websites, distribution channels. Once you’ve found a company that may go public in the future, you may have an opportunity to invest in the next Microsoft by receiving stock for your services, not your money.

So what can you provide for a company in exchange for very cheap stock? Do you have an office they can rent? Can you sell their products in your store or office? Can you provide tax or accounting help? If it’s a mining company, can you take a week to go to the mine and help clear timber? Can you simply answer the phone? Ask yourself what you can offer the company (remember, a true startup probably needs everything) and provide it in exchange for stock.

A company can’t go public until a lot of work is completed first. All the accounting and taxes and distribution and assembly, all the work that turns an idea into a company must be done by someone, and those people often get paid in shares of that company. And difference in return between buying stock and earning stock can be phenomenal.

So how do you find these companies? You start by looking in your own backyard. Do you know someone with an idea but no follow through? Helping him understand what a public offering can mean for the company and for his pocketbook can bring you a long way to the inside. Find out what he needs and help organize it. Put up some money to increase production. That way you can buy a part of the next Microsoft while it’s still micro.

Talk to your broker about little companies that may, someday, go public. Then get on the phone and see how you can help.

Do you know anyone who has taken a small company public? People don’t generally do just one, and chances are he knows people who are doing it, companies that are planning for the eventuality of an IPO. Get in, get your hands dirty. Network. Offer value to companies, and they will reciprocate.

A true startup can take years from the idea phase (and you’ve got to understand and believe in the idea or you won’t stick it out), to the day it goes public to fanfare and ticker-tape. Being on the inside for years can help you accumulate a lot of very cheap stock. Then when it does go public, you’ll already be a winner.

Related Post:

• Researching a Company for Investment
• Start your Day Trade Research
• Learning to Evaluate Stock Market Risks