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Five things to look out for before investing into a Start-Up
Posted by Jason Kluver on 27 Jan 2017
The world of start-ups sounds very exciting; and it can be if you back a winner. But the reality is that most start-ups fail.
And with a plethora of opportunities being presented to us daily, via various crowdfunding platforms, how does one find the time to understand the deals, in order to make a sound investment decision?
Here are five key things you should look for before investing into any start-up.
Is there a large consumer or social problem being solved? In other words, is it scalable? What’s the point of investing into a local coffee shop, when there are other potentially global opportunities available? There is a reason bucket loads of institutional money, has been going into Platforms and SaaS (Software as a Service) Models. They are hugely scalable and relevant to hundreds of millions, if not billions of people.
The right team is critical to making your investment a success. Does the business have the right blend of youth and experience? Are they doing it full-time? Is there enough resource to deliver what they are proposing? You need to know the right people are in place. The correct blend of people with the right skillsets and experience is essential to make the business a success and therefore, make you a return.
This is very important. They might have an outstanding product offering but has this team previously grown a business and exited successfully? If they haven’t, then that’s not the end of the world. But do they have the passion and desire, as well as someone in their team that has taken a business to a successful exit?
Total Funding Requirement
Does the opportunity have a funding plan that takes them beyond revenue generation and well into profit? What happens when this first round of funding dries up? It’s no good funding something that doesn’t have a growth and further funding plan in place. You are simply throwing your money away and paying someone’s wages for a short period of time.
Do they have one? How are you going to get your money back, let alone a return on your investment? Start-ups are, by their very nature, illiquid – you can’t sell your shares easily unless there is an exit opportunity to do so. It’s therefore extremely important the entrepreneur has thought about how they intend to pay your initial investment back… and hopefully, a return.
There are many other things to consider when evaluating a start-up opportunity. But a quick glance with the above points in mind, will save you lots of time as you click through you favourite crowdfunding platform.
If an opportunity can’t address these points well enough, move on.
Words by Jason Kluver, COO of ShadowFoundr