So you want to be a startup investor? Here are things you should know.

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I have been doing startup investments for some time now and have made my fair share of mistakes in the process. The following is based on what I’ve learned along the way. How do you go about startup investment? What are the pitfalls? What about investing in markets like Bangladesh, Indonesia, or similar emerging markets?

First, let us have a look at where investment fits in in the whole startup ecosystem.

The startup journey

The journey begins when a founder comes up with an idea and forms a company. Some founders go through different accelerator programs — organized independently or by corporates. The first outside money to enter the company is usually in the form of angel/seed funding. (Around 20 percent of startups get their initial funds in this form.)

They get funding from more institutionalized VCs — known as growth funds — at a later stage. Usually, 10 percent of companies end up getting growth funding. The rest shut down more often than not, and their founders either join another company in the ecosystem or go back to start another venture.

After a journey of six to seven years or more, founders may end up with a successful exit in the form of an IPO or acquisition. The successful founders then come back to the system as investors; some start another company creating a cycle of growth. This is what makes Silicon Valley what it is today.

Here are a couple of points to note here:

• A small percentage of startups end up in a successful exit (usually around 1 percent or less).
• Both successful and unsuccessful founders continue to strengthen the Silicon Valley ecosystem.
• The journey from idea to exit is a long one and can take anywhere between six to ten years.
• Investors like angels, seed, venture capitals, and private equity play critical roles at different stages of the company’s journey.

So, if you want to be a startup investor, you need to remember a couple of things.

Startup investors, take note

Most of your investments will fail

As you have noticed, most of the companies end in failure. Your portfolio of companies will suffer a similar fate.

This is illiquid

You are investing in a time frame of six to ten years to get a return on your investment. Unlike an investment in a publicly traded stock, your money is locked for a long time and will not be easily encashed.

Fall in love

Why you should invest

Tips in investing

A note on investing in early stage markets