How to Ensure a Rate of Return When Investing in a Startup
Choosing to invest in a startup business is a decision that deserves careful consideration. Despite the opportunity for a high rate of return, it is also ripe with risk. Executing a good investment in a startup comes down to research, knowledge of the market, experience and luck. Fortunately, there are a number of steps investors can take to ensure a better chance for a return on investment (ROI).
Identify the Right Investment
Risk is inherent when investing in a startup, so the challenge is to mitigate it as much as possible by identifying the stand-out businesses. One important factor to consider is if the business is expandable, meaning it can keep costs low and maintain a high profit margin. It is also important to review the company’s exit strategy. Knowing if the business is being built to sell - and its target selling price - or go public can have a big impact on the success of the investment.
Here are a few other questions to consider when investing in a startup:
- Is the company’s product/service marketable to the right target audience, and has enough research been done to properly identify the customer?
- What is the business’ exit strategy?
- Who is leading the business? What sort of experience do they have?
- Is there a strong financial and operations plan in place?
Know the Industry
Investors often have a voice in business decisions, so it is essential to be familiar with the company’s industry. Possessing this insider’s knowledge allows the investor to make more strategic, educated decisions, which gives them direct control over their own investment’s rate of return.
Evaluate the Business Model
Since startups have no previous experience or revenue, they rely solely on future projections to plan ahead. Business models are often the best way to display the company’s predicted growth and analyze the advancement strategies prior to investing. If the business projects early rapid progression, it will likely be a good investment.
There are many factors to consider when investing in a startup business. It can be difficult to determine which factors outweigh others, how long the investment will last, and understand the logistics of investing. Working with a business attorney who is experienced in working with investors can help organize these determining factors to help decide if investing in a particular startup is the right move.