As an experienced investor you may be drawn to higher risk and technology companies for making money. As a new investor, you may be drawn rather to investing in an industry which you know. Whether you are looking for a start-up to invest in by growth, by potential income, or by familiarity with the industry, there are some other factors you’ll do well to carefully consider.
The team behind any start-up is key, as they will be making the decisions and driving the company in a certain direction.
The strength of the team, in terms of how their individual skills complement and reinforce each other, how they have dealt with major setbacks and pulled together, how flexible they are and how they have adapted to market change, are questions that must be answered.
Preferably, you’ll want to find a product leader with a strong customer focus. But in all cases, it’s vital to speak with the end users — their customers or potential customers– to establish that they will buy the product and that it solves a problem for them.
You’ll need to know that the company’s products are better than their competitors and future competitors.
In the case of a tech company just for example, you could ask for a written description of the tech problem that the start-up solves, proof that customers are willing to pay to solve this problem, confirmation that their tech solves this problem and some information which might establish that it is difficult to copy their product.
Ideally, you’ll be looking for a high growth and scalable start-up which has the potential to pay back ten times the amount you invest and is attractive to potential future acquirers.
So, it’s important to have proof of the company’s target market, how the market and product work together, how flexible the company is and how they have adapted to market change.
It is vital that there is a clear market strategy in terms of choosing their partners, the process to get to market, and also to ensure that the length of the sales cycle is realistic.
You will need to go through the start -up’s financial plans in fine detail, looking at forecast turnover and profit, forecast cash flow and balance sheet and the risks associated with their assumptions.
Don’t be afraid to ask them for forecasts showing the range of scenarios based on their assumptions. If the business is valued too high, it can affect future financing which they may need.
A start-up with technical and business oriented co-founders, a team which complements each other, previous industry experience, and co – founders who are trying to solve a problem which many people have, would be ideal.
But always remember – make sure that the company is a good fit with you and that they understand that investment is a synergy.