Business startups are popping up all the time in just about every imaginable niche.
Many entrepreneurs launch their startups with the hope of attracting investors to fund and propel their businesses.
This is one of the reasons why several online crowdfunding platforms such as Kickstarter have become very popular nowadays.
There are many opportunities where ordinary people can invest in new businesses, products, and ideas.
Investing in a startup can be a lucrative venture.
In fact, many business leaders have built their portfolio around venture capitalism and angel investments.
Chris Sacca is one such entrepreneur who has made a name for himself, particularly in the tech industry by investing in startups and helping new businesses grow.
Sacca is currently involved in over 70 companies, some of the most notable ones are Uber, Twitter, Instagram, and Kickstarter.
Every business has a component of risk, and most businesses are especially vulnerable during the early stages.
You have to make careful considerations when investing in a startup to make sure that you get your money’s worth in returns.
Here are some of the crucial things you need to do when selecting the right startup to invest in.
Understand the Industry
Learn as much as there is to know about the industry you want to invest in.
Research the market dynamics, other companies and businesses in the same niche, analyze the consumers and find out how this new startup fits into the whole picture.
It’s much better to invest in a domain you’re already familiar with or are passionate about, instead of marching into unfamiliar territories where you’ll have to learn everything from scratch.
Keep in mind that to gain a full understanding of a particular industry may take years of experience.
Fortunately, however, you can learn a detailed overview of an industry from analysts, other entrepreneurs, and business consultancy services.
Having a clear idea of what a particular industry is like from a business perspective should help inform your investment decision and know what to expect.
Learn the Business
After figuring out the industry, you also need to understand the startup business itself.
Learn what the business is selling, who they are selling to, and how they hope to grow their enterprise.
It’s important to know what you’re getting into from the very start.
Ask yourself whether it’s the kind of business you’d be proud to be a part of, or whether you can get behind their products and services.
Sometimes, making this choice is not a matter of sales figures or market analysis; it mostly boils down to personal preferences and reservations.
Besides the business aspect, find out what the company stands for – their goals, vision, mission, and aspirations.
Are the company’s products or services solving any worthwhile problems?
Scrutinize the Founders and Team
Don’t forget to examine the team or founders behind the new company.
Every business needs to have the right people backing it up, especially during the critical startup stages.
The human factor can make all the difference between the success and failure of a business startup.
Drill into the business, leadership, and even personal backgrounds of the people leading the startup.
Do they have prior experience or the necessary temperament and skills to lead a business to success?
It may not be easy to answer this question, but it’s a query worth exploring.
If possible, meet with the founders or entrepreneurs and have a candid discussion about the business and their aspiration to find out whether they are the right business partners for you as an investor.
Asses the ROI
One of the most important questions to ask yourself is, “how do you make money off the investment?”
The return on investment often influences big investment decisions.
Is the startup convincing enough when it comes to ROI, or is there a higher chance of losing all your money?
Although business is about managing expectations and risks, it’s crucial to have a clear money-making plan.
As an investor, you may have the power to weigh in on the ROI approach. For instance, you can ask for equity or shares in the company or even propose a loyalty system where you make a bit of money on every sale.
All in all, just make sure there is a solid plan to get your money back and then some to make the investment worth your while.
Determine How the Investment Affects Your Portfolio
If you’re already involved with other businesses or investments, you need to consider how a new investment could affect your business portfolio.
Although it’s essential to diversify your investment portfolio, avoid making an investment that puts your other investments at risk. For instance, don’t become part of a company that competes with another company in your portfolio; that would create a conflict of interest. You should ideally invest in a business that complements the rest of your investments.
Investing in startups can be a risky business, particularly given their high rate of failure; such ventures are not for the faint-hearted.
On the other hand, startups can grow to insanely profitable industrial leaders and pace-setters in just a short time after careful nurturing.