Demos Parneros | What to Look for When Investing in Start-Ups

Imagine you’ve heard about a new start-up company that has an interesting mission and seems to have strong potential, but you’re on the fence about investing.

Every investment involves risk, but there are certain areas you can investigate to help you make a decision.

The most important factors you should focus on are the leader and their team. The people, their skill sets, and their attitudes can make or break a start-up. A passionate leader with a great team can take a business plan from good to great, while a less effective founder with an inconsistent team will have problems executing even the greatest business plan.

Here are some other areas that you might like to have a look at. I have added the same to the Demos Parneros blog’s website.

Who came up with the idea for the business and why is it important to them? Every business faces challenges, but passion for an idea can help pull people through.

Review the business plan closely. Avoid any start-up with a vague, sketched-out idea or outline. There should be a vision explaining its starting stages, growth predictions, and how it can scale, with realistic targets and timelines. The business plan should also include:

• Analysis of market niche and targeted customers
• Review of viable competitors
• Detailed financial projections
• Marketing plans with clear customer acquisition strategy
• Potential difficulties and how to address them
• Timeline for investors to begin seeing returns and profits

Is the start-up a new or unique idea? A company that can show its product creating a new market niche, or that the existing market itself isn’t saturated, is worth a look. Even in a saturated market, a superior product can still win out.

While your main interest as an investor may be in eventually getting a return on your money, it can also be worthwhile to support a cause you believe in. Do you agree with the vision? Do the leaders believe in the mission? Don’t underestimate the role of people’s hearts in the success of a business.

Any serious company will have all of the parties’ contractual rights and obligations clearly assigned, and this includes the investor. It’s crucial to have clarity before you start shaking hands. The stockholder’s agreement should address the fallout from certain scenarios that might occur and include a clear evaluation of the business being invested in, which will provide an accurate representation of a company’s valuation and potential worth.

Always remember, with start-ups, perhaps more than with other types of investment, you can lose all the money you invested. If you can’t live with that possibility, start-up investment is probably not the strategy for you.The leaders of any start-up you invest in should have skills and other assets, to show you just how serious they are. If the idea is good, the leadership is passionate, and the team is talented and motivated, then the start-up may be a good candidate for investment.