Investing in a start-up can be rewarding both personally and financially. Personally, because you are contributing to the formation of new jobs, and the introduction of a new solution in the market. Picking the right start-up is not an easy thing to do, and it is the truth that even the most experienced investor will have one or two failed start-ups’ in their portfolio. But if the investment is good, it can yield anywhere between five times to 100 times the initial investment. Here are some critical factors to consider before while planning for a start-up investment:
1. Invest in the field you are aware of
This is one of the best ways to reduce the risk of investment. If you are aware of the market, you can better judge the progress and plan of the company. Also, you can provide timely wisdom and guidance if, at any point, the decisions of the founders are questionable. Ensure that the business model is scalable, which means you will get back the money you invest in the company.
2. Go through the track record of the founders
The team of the company is essentially its foundation and it is one of the most critical factors for the success of early-stage companies. The product or service needs to be iterated multiple times before it is fit to the market. This requires immense skills and high levels of passion from the founders. Focus on the background of the founders and be clear about everything they bring on the table.
3. Investment in multiple places
Diversification of investment is one of the primary lessons any investor learns. If you do so, the probability of your investments being successful increases and the risk associated reduces. It also increases the chances that you will get your money back at public offerings or acquisition by some other company. Investments are meant to be for a long – term, so be patient about them.
4. See what they are going to do with the money
The first money you put is what matters. The investor must know what plans the founders have with the money you put in. The start-up which sells either a product or a service must be charging a good and fair amount from its customers. There is no point in investing in companies that do not have the plans and means to sustain themselves financially.
5. Go through all legal documents
Before finalizing the investment, you must look at all legal documents of the companies such as the letter of incorporation, subscription agreement, investor agreement, term sheet, etc. This can help you know the structure of the company and the people in various positions. Here you have to put special focus on how the deal is being structured by the start-up and what is the ownership percentage, the company is willing to offer you for the amount of money you are investing.
6. See the competitors
It is important to look at the competitors of the start-up in question and see what advantage does this start-up must beat them in the race. Investigate the appetite in the market as the competition in some cases could simply acquire this start-up rather than clone their work. The start-up must operate in a big market and the team behind the start-up must focus on developing good relationships with customers. Feedback is a very important factor for the iteration of the product/service until they get it right.