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5 Things to Consider Before Investing in a Startup

Consider Before Investing in a Startup

Investing in a startup comes with tons of risks. However, it also comes with many possible opportunities. Investing in the right startup can open doors to new sources of profit for you, but how will you know which startup to invest in?

So, here are a few things to consider before investing in a startup.

#1 Understand the Startup's Business Model

The first step in researching a startup is figuring out what problem it is solving and whether that problem resonates with you. You should be able to tell the startup's story without looking at any numbers or facts about the business model. If a company says that it provides personal loans for self-employed people but does not have a good credit score, it should raise some red flags.

A good business model answers all your questions clearly without you having to dive deep into the business history. It also makes sure it has enough money in its bank account before asking investors for more funds. Otherwise, as an investor, you should not risk investing in the startup.

#2 Review Their Products and Services

When investing in a startup, you must review the company's products and services carefully. Ask yourself these questions.

  • What market space is the startup operating in?
  • Who are its competitors?
  • What product or service does it offer?
  • Does the startup have any IP (intellectual property) that may be valuable down the line?

You can find answers to these questions by checking out the company's website, social media accounts, and online reviews from customers. Do not blindly trust the proposal they send you asking for an investment.

#3 Know the Potential Risks and Rewards

There are several types of risks to understand before investing in a startup. Some will impact you immediately, while others may not appear until months or years down the road.

The first and most obvious type is financial risk. It refers to the chance that your investment will not pay off as you had hoped.

In addition to this, there are also personal and professional risks. Here, you may end up investing so much time into supporting a business that you are putting your other projects or businesses at risk.

Finally, there are two other types of risk: immediate versus delayed. Immediate risks could be anything from legal issues with the business owner's past or current employees suing for unfair treatment at work. These types of problems do not always come up right away but can cause serious issues down the line.

Delayed risks tend not to happen right away either. However, they may be more difficult for investors who are not paying attention to where their investments are going or how the startups are using them.

Keeping track of the company data, its clients, client assets, account information, compliance procedures, resources, etc., is a good way to manage investment risk. Asset Map + Orion Integration recently developed an advanced system to support such analysis. With modern analytic systems, it becomes much easier for investors to manage these risks.

#4 Research the Management Team

Conduct thorough research into the founder(s), management team, and advisory board of any startup you are considering investing in. The best way to do this is by going through their LinkedIn profiles or the company website.

You must understand the skill set of each member of a startup's management team so that you know if they have what it takes to successfully utilize your investments.

#5 Study the Startup's Growth Plans

When you're looking at a startup, try to understand how that company plans to grow.

A growth plan can be as simple as an idea that the founder has for expanding sales. It can also be more complex, like a detailed outline of strategies and tactics that they will implement over several years. Some examples of growth plans include:

  • The company will create a new product or service and market it through social media or paid advertising campaigns.
  • The company will find additional funding for expansion from investors like angel investors or venture capitalists (VCs).

There are some general guidelines you should follow when assessing how well the startup’s business plans align with its goals.

  • Evaluate whether the entrepreneur has specific plans on how he/she wants to grow their business over time.
  • Ask yourself if the startup is realistic about what type of growth they expect from their product or service launches.

As long as you ensure all these, you will never make a bad investment decision or end up investing in a bad startup.

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