The idea of investing in a startup and generating profit seems interesting. But, you can’t just whip out the checkbook and make a donation blindly. Take a step back and think if you really see good returns on your investment.
As investing your money in a startup can be risky, you need to perform due diligence beforehand. Below are a few things you should keep in mind before investing in a startup-
The Startup Should Have a Viable Business Plan
Before investing in a startup, an investor must check that their business plan is a plan and not merely an idea. See the proper framework of the entire process; the plan should be something practical and easy-to-implement.
Aside from this, the business proposition should be innovative enough to provide a reliable solution to a problem. For example, companies like Uber are successful because they identified the customers’ problems and provided the right solution to it.
Know The Team’s Skills and Passion
Investing in a startup means investing in a team. You are not just investing in their products and services, but the leadership and management ability of the team. Thus, you want to know how good the team members are at executing a business plan and handling everything.
Furthermore, the team members are experienced in what they want to accomplish. Is this their first business venture, or have they ever been successful with another company too? See how efficient the team is. Don’t set for anything less than a qualified and experienced team. Where skills and experience are lacking, shelters can help.
Ask them about the Startup’s 10-year Goal
Startup founders have different goals or strengths. Some are experienced at working in a team of 10, while others struggle to expand their team up to 100. Some founders are passionate enough to scale their startups for ten years, while others may get bored easily and want to try something new.
So, as an investor, you need to ensure that all the terms and agreements are in place. Moreover, the startup allows a founder exit that won’t play havoc with the business.
Review Their Plan for Startup Funding
Ask how the startup plans to utilize the next round of fundraising. Check if they have a strong plan about how they want to spend it. Though most startups will talk about growth, development, or marketing, you need to dig a bit deeper.
Also, look at the big expenses and know the costs. Will they hire more technical staff for development? If yes, at what cost and how many? Understand if it is really a marketing plan or just numbers that look good.
Check the Potential Market of the Startup
Before investing, you want to know everything about the startup. Besides, you also want to know the size of the target audience for products and services.
If you find that the market size isn’t large, the investors won’t like to invest because they may not get enough returns from the investment. The business should have a long-term goal. Though the business doesn’t sell in the entire state or country, you must know that there is growth potential.
See How Well the Founder Executes the Plan
If the startup business idea is innovative, it appears more compelling when sold by a good founder. While the investor focuses on the team first, the founder’s ability to execute the idea should be your topmost priority.
There might be founders who haven’t launched a startup before, and its fine. But, they should show their ability to turn an idea into reality through some other experience.
Every investor should have criteria while considering an investing opportunity. However, the points mentioned above will provide you with a general understanding of the startup you plan to invest in.
Also read: The Real Crowdfunding Challenge