How to invest in start-ups

For founders who have exited their company, investing in another start-up can be a natural next step. However, it's important that to remember that investing in early-stage companies carries significant risk, and that success is never guaranteed. 

"I don't follow the rules - I invest a large portion of my money in start-ups and keep the rest invested more conservatively." This advice comes from one of today's most successful investors and business angels, the Austrian Johann Hansmann. In the 1990s, Hansmann founded a pharmaceutical company that he later sold with great success, reinvesting the proceeds in numerous start-ups, now numbering about 100.

Many founders dream of achieving that kind of transformative exit. Manuele Lussu, Head Relationship Management at LGT Bank Austria, knows numerous business angels who have reinvested the proceeds of a sale. "Founders tend to be risk-takers", says Lussu. He therefore advises that such proceeds be invested according to a risk-adjusted investment strategy. "Not every good founder is also a good investor", he explains, stressing the importance of determining which investment strategy will best help them achieve their goals. 

Founders have a major advantage when investing in start-ups: they are already familiar with the start-up ecosystem, capital markets and the financial health of promising companies. "They should take advantage of that", says Christian Ortner, Relationship Manager at LGT Private Banking, adding, "Founders who have successfully exited their company know what to look for. They should leverage that expertise when investing." However, it is also crucial that the company "is a good fit", he adds.

Dominic Berner, Relationship Manager at LGT Private Banking, advises founders to use their experience and market knowledge to help them steer clear of short-term trends. "When considering investing in a start-up, ask yourself: what problem does it solve, and is that problem significant enough to generate profit?" Berner adds: "Most importantly, you need to approach an investment calmly. Don't let yourself get carried away. After an exit, people are often tempted to invest too much, too quickly. Instead, they should take some time to digest everything first."

There are several ways to invest in start-ups:

• Direct investments: Business angels invest directly in a start-up, taking an equity stake that allows them to influence the company's direction. This approach requires thorough due diligence and hands-on support.
• Venture capital funds: For those who prefer an indirect approach, venture capital funds offer the opportunity to invest in a diversified portfolio of start-ups. While this provides professional management and diversification, it often comes with high minimum investments and management fees.
• Secondary markets: These platforms allow investors to purchase stakes in later financing rounds or on specialised marketplaces, typically targeting more mature start-ups.

Berner also emphasises the importance of "smart money" - capital that not only provides financial backing but also brings know-how, strategic support and valuable connections to the start-up. This approach can be a game changer for emerging companies and enables investors to actively contribute to advancing the company.

Thorough due diligence is essential

Of course, the numbers have to be convincing too. Investing in a start-up therefore requires thorough due diligence, where the team, business model, market potential and financial figures all play a crucial role. Would-be investors should ask themselves:  

• Is the business model scalable?
• Does the company generate recurring income or enjoy high margins?
• How large is the target market and how strong is the competition?
• How effectively have the funds from previous financing rounds been utilised and what are the cash reserves like?

"For many founders, returning to the start-up world - usually in a different role - makes a lot of sense. They have a lot to contribute, including networks and expertise", says Berner. Ideally, they also know the founders and can ask themselves important questions such as: 

• Do they have the skills to scale the company?
• Is there a clear vision for a potential exit?
• Are the expectations realistic?

In an interview with the Austrian daily Kleine Zeitung, serial investor Johann Hansmann emphasised the fundamental role that founders play in his investment decisions: "At the stage when I invest, the business model and product are still in their infancy. So it's much, much more important to choose the right founders and the right founding team."