On considering investing in a startup, you should preferably look for a company that provides services or products you are familiar with. You may be familiar with biotech or digital media and could thus make a reasonably good guess as to how successful the venture could be. That helps reducing the element of risk. Before investing in any startup company, you should essentially collect maximum possible information pertaining to the background of people involved, their business ideas and the funds they may have already collected. Find out how the owners can add value to the venture. It is imperative to question the owners if the business can be expanded or upgraded on demand as it enables you have a quick turnaround of your investment. Investment in a startup can bring you huge profits or heavy losses. It largely depends on the kind of questions you ask the owners before making investment.
As an investor, you have to take that tough decision on the amount of money you can put to risk. Certainly, no startup company can afford to guarantee any returns. Investments in such a company are a lot more risky than investing in an old established company, having already developed a market for itself. Keep in mind that being a startup company, it needs time to grow. It is quite likely for the return on investment to be low during the first yew years but would improve as the business starts gaining momentum. Keep these factors in mind while calculating your return on investment and if you do not find it attractive, look for some other company for making investment.
2. Who are the other investors and how many have already invested in the startup?
You need to study the capitalization table to know how many investors have already agreed to accept the offer and if they already hold stocks. The kind of people who agreed to invest also gives you some indication about the prospects of the company’s product or services. Find out if the owners have any financial stakes. Preferably, they should make financial contribution in the startup. Do not get carried away by the sales talk of the CEO of the startup when he tells you that you alone are going to be the investor. It may be worthwhile being the only investor if the business is small sized, not requiring large investment, but its survival may be difficult when it starts growing. The benefit of having a couple of additional investors is that the loss, if any, is shared by all, meaning your loss is reduced. Remember, the old adage “don’t put all your eggs in the same basket.” Spread your investment over a couple of ventures.
3. What does the business do and who is the owner?
It is vital that you understand the business. Can you make out the product or the services it provides? How is that different from what may already be available in the market? Unless you can answer that, you cannot assess the market for that business or the rate at which its demand could go up. It is imperative for the owner to possess entrepreneurial skills to profitably direct the venture. Question the background of the owner and find out their qualifications. Try to assess his abilities of carrying responsibly that the circumstances are quite likely to demand. Find out how realistic the plans, goals and milestones of the business are. All this helps you to know if the business could collapse!