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5 Keys for Startup Investors

Hundreds of thousands of businesses are established every year. Many of them require significant capital, which offers opportunities for investors.

While startup investing isn’t for everyone, those with a high risk tolerance can find it an exciting and potentially rewarding time. The possibility of getting in on the ground floor of another Uber or Facebook, however speculative, could be compelling.

Imagine you hear about an exciting new company that is looking for investors. You know that most startups fail within the first few years, but you think this one can make it big. What do you do?

1. Check out Management

Ultimately you are not just investing in a product or an idea, but in the people who run the company. No matter how innovative or promising the business concept may seem, the company is unlikely to succeed without competent management. You need to evaluate not only the founders, but also those who promote the investment. An initial review can often be done online. In the case of people with professional licenses (such as brokers, accountants and lawyers), you can check their license status and any disciplinary history. You want people working with or associated with the company to not only have clean backgrounds, but also a track record of success in other ventures. Look for qualities such as experience, intelligence, creativity, integrity, discipline, and leadership skills.

2. Determine How the Business Will Make Money

Many companies are founded on an interesting concept. But the company must be able to translate that concept into a product or service that it can produce and sell profitably and at sufficient rates to generate reasonable cash flow. What is the initial funding plan? What is the market demand? Who are the competitors? What is the marketing strategy? Is the business scalable, with the ability to grow rapidly without sacrificing quality or profitability? If the company cannot provide good answers to these questions, the possibility of its success is doubtful.

3. Focus on Consultants

If you’re buying a used car, it’s good practice to hire a mechanic to look at the vehicle to make sure you don’t get a lemon. The same principle applies to evaluating a startup. It is important to use qualified professionals, such as lawyers and accountants. Make sure your advisors are familiar with startups – an attorney who specializes in personal injury cases may not be a good fit. You may also want to consult with experts in the business sector in which the startup operates. Your mentors will provide different insights that you may not have on your own. They will also help you gain respect from the company.

4. Study the entire Introduction

Ask lots of questions and ask for lots of documents. If the business is concerned about disclosing confidential information, it can make you sign a non-disclosure agreement. You and your advisors will want to review the initial business plan, memorandum, financial statements, budget, balance sheet, and corporate documents (articles, bylaws, previous investor agreements, etc.), if the documents are sketchy or incomplete, it is . bad sign Be wary of internal financial statements; Statements prepared by an outside CPA are more reliable. Audited financial statements are the best, but they are less expensive. If your inquiry raises red flags, insist on full explanations.

5. Review Investment Documents

Your advisors can be of great help here. At the very least, you want to be fully informed about how the contract is structured and what rights and obligations you and the company will have. Your lawyer can advise you on which changes to the document may be in your best interest and help you negotiate with the company. Your accountant can let you know if the assessment seems reasonable. Do not proceed until everything is fully documented. You should not invest based on handouts or just verbal assurances.

Initial investment requires patience and hard work. Although there are no guarantees, you can reduce the risks and increase the chances of success by following the principles discussed above.

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