Investing in a Start-up Can be Risky. Follow These Tips to Play Safe
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If you are on LinkedIn and connected to anyone in the start-up world, you are bound to notice a healthy debate on funding between start-ups and investors. Investors are happily putting their money on start-ups that promise to yield more than average returns and start-ups are capitalizing with their ideas and passion.
The demand and supply of money, so far, has simply been dependant on the attractiveness of the business plans presented by start-ups and the returns as seen from the investor’s lens. In many cases, the start-ups have not been able to scale and have shut down their shops or have scaled but are unable to generate returns even after years of operation.
Investing in a young company involves high risk, but can be rewarding for investors looking for high returns. New Investors considering investments in start-ups should be mindful of usual pitfalls and understand the risks before making investments.
If you are considering getting into the space, you can refer to the following guidelines for a general overview of Dos and Don’ts before making an investment.
1. Consider the business objective. Does the business solve an existing problem? Do they have at least a few potential customers that will utilize the solution offered? If you are investing in a business that has at least some immediate users, there is a high probability that the business will succeed. Do not get trapped by a potential need in future. Only businesses that are right in time will be efficient enough to create returns on your investments.
2.Consider proposed revenue model when compared with competition. If the problem being addressed is well know, there is a likelihood that there are many solutions offered in the market. Evaluate if the proposed revenue model is likely to perform better when compared with competition. Sometimes the proposed revenue model may be feasible but may not be scalable.
3.Success of a great business idea is dependent on the people working on it. Evaluate the strengths of the people involved in the business. Most investors invest in people smarter than them. One has to make it absolutely certain that the proposed team is more than its words and is capable of executing the proposed business model.
4. Make sure you ask for a business plan and evaluate the execution strategy in detail. The assumptions made should be grounded with market reality. It is possible to go to moon, but there is a cost and it has to make sense.
5. Founders have to be deeply involved with their own money for success of their business idea. Get the founding members to invest capital.
1. Do not put all your eggs into one basket. Diversify your investments in several start-ups and in other assets.
2. If you do not understand the business, do not invest unless you are investing with someone who does understand the business.
3. Most start-ups are cash flow negative for the first couple of years, meaning they burn more money than they make. Therefore, investors must understand that start-up investment is a long term game. Do not expect immediate gains.
4. Quit following the herd. Do not go where everyone is going as that’s an opportunity that won’t last for very long.
5. On a concluding note, investing in a promising start-up can be rewarding, provided one follows the rules of the game. Additionally, one needs to be realistic and not let oneself to be fooled by pretentious Jargons and aesthetics.