Thinking about investing in a startup business?
Investing in a startup business can be an attractive, exciting and promising opportunity. But, like any investment, you must do your homework and thoroughly assess the potential.
In most cases, startup businesses are new businesses that are yet to prove themselves. By this, I mean they’re yet to make a profit. Here are some pointers we use at Angel Advisory when helping our clients assess the potential of investing in a business yet to earn a profit (and sometimes revenue). 1. The Key Stakeholders
These are the key people who will manage and run the business and ultimately be responsible for making sure it goes from strength to strength (and your investment is worthwhile.
Before investing, you want to know how they will be paid and what their financial position is. Questions to ask include:
· Will they be using your funds to pay themselves?
· Will they be using their own personal savings to fund the venture?
· What their cost of living is, and how much do they need to live while they grow this business?
While these might seem highly personal questions, you need to ask them to make sure the people you are investing in are financially stable and won’t be withdrawing funds from the business to maintain or fund their lifestyle. If they're forced to draw money from the business, this can quickly diminish cash reserves needed to fund future growth and require more capital raisings, putting pressure on your investment.
2. Experience of the team
Who is a part of the team you’re investing in, and what is their experience in running a business and, more importantly, in running a start-up?
Startups often have issues with cash flow management, and knowing what to do at the right times is critical to the business's success. You want to ensure that the person you're investing in and the people around them have the right experience. While judging a person by their efforts is important, ensuring they have experience running a business, especially as it gets bigger and bigger, will give your investment the best opportunity.
3. Financial projections
Obtain information about the financial position and projections for the company. You want to stress test the projections and ensure they are realistic. Will the amount of money they're raising be sufficient to allow them to grow and hit their financial projections?
Sometimes, when the business model is yet to be proven, it's easy to over-project revenue and under-project expenses. It is vital that you question the expenses and the projected revenue because it is possible they could have their heads in the clouds, and as an investor, you need to bring all issues to light.
4. The market and competitors
Who are the competitors in the industry? Who is already doing something similar? If a new concept or idea and no one else is doing it, why might it work?
When it is a proven business model, it gives you confidence that it's been tested and it works. Some slight amendments can make a functioning model work even better. But when it's a brand-new industry or concept with no competitors, it pays to be wary because it's not a proven business model and is, therefore, a higher risk investment. 5. Get professional advice
Startup businesses can be great investments, but they can also be terrible investments too. While these are some of the fundamental factors you should assess, there is a lot of detail to be worked through and analysis that needs to be performed to ensure your capital is protected and the investment is right for you. Getting professional advice from a financial advisor with experience in this space, like Angel Advisory, and your accountant is essential. Happy investing. From your friendly team at Angel Advisory The information contained in this article is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser.
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