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If you are looking to invest in a startup, we’ve got some good news for you – you have plenty of options to choose from. But the bad news is you cannot accurately determine which startup could win in the long run. Thankfully, there are a few things you can consider, to narrow down your chances of investing in the wrong startup.
If a company is selling a local product or a good that’s restrictive to a specific geography, there is no point investing, especially if you’d like to see your money generating great returns. There’s a reason why most venture capitalists and angel investors put their money on software firms.
A digital tool can be scaled at will and made relevant to several hundred million people anytime. There are no geographic restrictions to such a product.
The team you are investing into should ideally be the right blend of experience and youth. The people behind the scenes should be committed to the company and must be working on the idea full-time. Remember, you are not just investing in the product but also the people.
If the people working on a product are not dedicated and passionate enough, then even a splendid product won’t be able to achieve its true and complete potential. Therefore, know the people working on the startup, and have some clarity about their intentions and motivation.
If you are investing in a team that has not done anything substantial in the past, you are taking a massive risk. Putting money in a team that’s working on its maiden project is akin to lending money to a stranger.
The chances of the stranger returning the money is none to slim. You don’t need an Elon Musk-like personality to be backing or working on the project, but the person should have some amount of credibility within the industry. If they don’t, then do they at least have some Advisors on board who do?
Why is track-record so important? It’s because a great product or idea coupled with passion and enthusiasm, alone, are not enough. To realise ideas or execute plans right, a certain level of administration and business skills are needed. And these are attributes that one can be sure of only if an individual has exhibited them in the past.
Nothing is guaranteed in business. Even the most exciting ideas may not be embraced by people. A successful entrepreneur should therefore be ready for all eventualities. They should know how to react to unexpected or undesired situations.
If there’s no alternative plan, not everything is doomed yet. But it’s important the entrepreneur and their team have the desire and passion to bounce back out of a difficult situation.
Consider what happens to your money if the startup fails. Will you get your money back? Generally, a startup is illiquid in nature. In other words, to get back your money, you would have to sell your shares. However, if there’s an exit plan in place, you are in a much safer position.
An exit plan or strategy is essentially a plan executed by a trader, investor, or business owner to minimise damage or maximise benefit. Therefore, it is important the entrepreneur you’re backing has thought about how to return investor funds..
Find out how much money the company needs to get out of the starting blocks. Also learn how the company will spend the money.
It is not recommended to invest in a firm that does not have a proper plan for growth and additional funding. At the end of the day, you don’t want to just pay for the salaries of the startup’s employees for a few months.