Are you thinking of investing in a start-up company? Although investing in a new company may seem like a good way to make a large return on investment (ROI), it is never that simple. In fact, small start-ups seeking capital might be the most risky investment opportunities out there. Obviously, not every start-up can or will be successful. If you invest without doing proper due diligence, you could end up costing yourself a large sum of money. Researching a company before agreeing to investing is an absolute must. So the question remains – what kind of research should you do before investing in a start-up company?
Review the Business in Full
Before investing any of your money, you must conduct due diligence on the business. To begin, you will want to complete a background check on the founders and directors of the company. If you do not believe in the people running the start-up, then you cannot expect the believe in the start-up itself. You should also check financials, projections, burn rate (how quickly a company will use shareholder capital), use of funds, competition, and market size. The full business plan should be available for investors to read and disseminate, as well as a list of all debts and liabilities. If this information is missing or inaccurate, you should not invest in the company.
For many investors, due diligence sounds like a lot of work. An investor would be wise to hire a business lawyer to aid in the due diligence process. Attorney, John McDuff claims “any experienced business attorney should be able to differentiate between a worthy investment and a dud.”
Research the Industry
The success or failure of a given company is often influenced by the industry that it is in. This is true for a number of reasons. Firstly, if a start-up company is joining an industry that is not profitable, the business will likely be just as unprofitable. Secondly, if the start-up offers no defining distinctions in the industry, it is unlikely that is will be successful. This is especially true in saturated industries. You want the company you invest in to have an advantage(s) by utilizing areas that have not yet been exploited in their industry.
How Long Until You Receive Your ROI?
A start-up company can take years to become profitable. How long are you willing to wait until you see your return on investment (ROI)? If you are in a position where you can be patient with your investments, you may be wise for investing in a start-up that has a higher ceiling for growth. However, if you do not have the time to wait for a ROI, or if you are simply looking for a quick profit, then start-up investing is not necessarily for you. It would be better to invest in public companies, or other companies that promise a quicker ROI.
Do Your Research!
It cannot be stated enough — is critical that you do your research before making an investment. Although you may have a good chance of seeing a large return on your investment, there are many risks that you need to be aware of as well. Performing the due diligence before you invest will greatly decrease your chances of losing money.
About the Author
The Law Office of John McDuff, P.C. practices business law and tax law in Austin, Texas. For more information, follow the law firm Google+ and YouTube.