6 Strategies to Consider
Before Investing in a Start-up
An average of 500,000 businesses are established in the United States each year. Most rely on family and friends for initial funding. But with current trends individual angel investors are fast becoming a critical source for start-up funding.
Even though angel investment can be rewarding, there are also risks. Entrepreneurs turning to angel investment to finance a start-up have mastered pitches that can be deceptive. This means angel investors need to do due diligence before investing their hard-earned money.
Here are six things to consider before investing in a start-up:
- Knowledge of the industry
It is safer to invest in an industry you are familiar with, because you are more likely to be influenced by a great pitch for a business in an industry you don’t know anything about.
This doesn’t mean you shouldn’t invest in start-ups from unfamiliar industries. If that’s what you want to do, you must go beyond the pitch and investigate the industry to determine if its market has the potential to grow and give you a good return on your investment.
- Research the person seeking funding
You don’t want to risk putting your money in the hands of someone who has no drive to succeed. You want to be sure the founder has enough passion and drive to push the business from good to great.
It is also important to understand the founder’s motivation. Will he back off at the slightest setback? Is he a dogged fighter who is self-motivated to succeed at all costs? You need to discover the answer to these questions by doing some extensive research.
Get to know the business history of the founder. Does he have a good track record when it comes to inspiring a business to succeed? Has he successfully launched a start-up before? You do not want to waste your money on a joker.
- Don’t invest what you cannot afford
Having millions of dollars in investable asset does not immediately qualify someone for the big game of investing in start-ups. Without due diligence, any investor could lose the entire investment.
No angel investor helps finance a start-up with the intention of losing money, but promising ventures often go haywire for a variety of reasons. The antidote is to not invest more than you can afford.
- Diversify your investment
You’re probably familiar with the axiom, “Don’t put all your eggs in one basket.” This is especially true in the business world. Even the most promising start-ups can fail, so don’t put all your investible funds in one start-up.
The best advice is to invest in more than one. That way, if one out of every five investments succeeds it can make up for the ones that fail.
- Monetization strategy
It takes time for your investment to yield returns. This means you need a monetization strategy to understand how much money needs to be invested before you will see a return and when you will start seeing returns. You need to research the start-up’s income and expenditure plan, how the start-up plans to use its financing and its strategy for financial growth.
The right answers to these questions will help you understand the monetization plan.
- Take care of the legalities
Investing in a start-up gives you some level of control over the affairs of the business. However, you need to know your ownership rights.
You also need to clearly understand all the terms and conditions of your investment as stated by the founder. It is always necessary to work with an investment expert. The job of the expert is to help you understand investment documents, so you are legally guided to make the right investment decision.
Finally, determine if the business start-up will fill a need in the marketplace. Don’t just sign a check because you have money. Do so because the business will add value to the economy.