Investing in a startup can be a very tricky affair. This is so because most startup owners lack the financial muscle necessary to give their ideas a face that would clearly demonstrate the business’ prospect to a potential investor. Moreover, a majority of startup owners don’t have proper records to paint a trustworthy picture on the startup’s stability and possible penetration of the market. The absence of such indicators increases the risk of investing in newly established businesses.
However, you can still invest in a startup, provided you employ some clear-cut investment principles. Below are a few tips to point you to the right startups to put your money in.
The Idea Vis-a-Vis the Market
When you are presented with a business plan, it might have a great innovation or idea, but you should ask yourself whether it’s going to be viable on a commercial scale. Is the solution or technology going to work as expected? Will the business be able to handle an increasing amount of sales or a growing amount of work in a cost-effective manner? A good business isn’t just about an idea; it is also about market-fit and execution.
Before pumping your money into any new business, get to know the startup owners very well. You need to evaluate how passionate and focused they are about the business. Even though a strong educational background could be a factor to consider, it can’t replace passion when it comes to raising a startup from the ground.
This isn’t about having intense infatuation or emotions towards the business. It’s about a true belief that the business has potential. Have the owners invested in the business? If yes, it shows they believe in its viability, and the inverse is also true.
You would not want to venture into a business whose idea is already being implemented by many other companies. That’s why it’s essential to establish whether the idea presented before you is unique and can make the company stand out in the industry in which it operates. Is there another big company working in the same line? Is there a possibility of the big company venturing into activities that would destroy the startup before it picks up? In as much as competition is healthy in the market, you wouldn’t want to invest in a startup that’s likely to be stifled to death by existing industry big names.
An important question to ask yourself is whether the team that the startup owner is working with comprises of people who have relevant qualifications. Their skills should be complementary to those of the founders. If it weren’t for this particular startup, are members of the team people who’re employable in similar projects?
And when considering their relevance to the business, consider core areas such as sales and marketing, product development, and technical operations. Are the people heading these departments qualified? Such questions would give you a better picture of whether the owner of the business really believes in it. If he’s working with qualified people, it means he has confidence that the business has the potential to pay the team members.
Finding the right startup to invest in isn’t easy, though. It requires vetting and thorough research. There is no guarantee for success. It’s a risk you’d be taking. Just make sure that your decision is good for your business goals.