3 Initial Steps to Consider before Investing in a Startup

By October 25, 2016Lifestyle

The fast pacing economies throughout the world have given a boost to the emergence of various startups primarily in IT, ecommerce & Technology sectors. Simultaneously, startups’ Investing has also evolved out as the most promising sector among the investors’ world. More than any other industry and even large-scale contracts, investors are much attracted towards investing money in upcoming startups. As an investor, you also would have been thinking to start investing in some startup. And, may be, you must have got a list of startups to choose from. If yes, then here is something you are going to love once you start reading it.

It’s nothing else than some pertinent suggestions to make you land on the right startup. One thing we would like you to keep in mind, even before thinking of making an investment, that like each investment sector, Startup investing is also a risk. So, you just need to very careful before signing the cheque for a startup you are going to invest in. And to make you walk on the path, here are some suggestions that may not only return your investments but can also let you enjoy unbelievable benefits. But most importantly, all these points need your own due diligence to avail you the desired results.

Study the Market

A deep study or an assessment into the market size and the prevalent competition is the very first important factor to needs your serious concern before making any investment in a startup. As far as the competition is concerned, you will find the phrase “the lesser the competition, the better the growth” to be true in real terms. It is better to invest in a startup that is the first of its kind, though having a less known product, than investing in a startup which offers a popular product or service but already has a number of competitors. Moreover, people rely more on the older names than the new ones. So, if you want to be a pole start among the crowded constellation, you need to find the startups that are just new with some unique product or service

Further, the market size also plays a major role in shaping your decision on a startup’s investment. Before going further into the detailed information on market size, the first and most important thing you to consider is that, the startup should be operative in a bigger market. Market size also ingrains the same effect as the competition; “the bigger the market, the faster the growth”. Just imagine the difference between an online bakery store selling cakes only in Ontario region in Canada but the other providing bakery products online throughout Canada. Which would have much better chances to grow more and faster?

Know the Team

Secondly, you should be well aware of the startup’s management team before you invest in it. Reason being, you are not investing in a product but in an idea and the people behind it. So, basically you are going to invest in the core working team of that specific startup. Thus, you must access the startup management on various grounds as: What is the educational and professional background of the management team members? How much experience they have in this particular industry? Do they have any experience in establishing any startup? If Yes, What is the current status of that startup? Do they have any experience in handling big teams?

Having accessed the answers to the above questions, you need to proceed towards collecting information on the chemistry between the co-founders of the startup. It is important to know because the business may face struggling and tough times as well and only a well-organized chemistry between the core team can make the startup face even the downtimes bravely. For an exact idea into the management people, make a thorough research on their social media profiles and people’s reviews about them. You will get to know perfectly if you are going to bet on the winning horse or not.

Does It Meets Legal Compulsions

The third most important factor to consider is the legal documentation. It should be somehow the most preferred thing while choosing a startup for investing. As per the views suggested by various industry experts and financial advisors, a startup that has been sound in it legal formalities and documentation, claims to be less risky when it comes on making investments in it.

A complete study into the legal documents of a startup will introduce you to all its legal structure and capability areas. How the company is structured? Who are involved into the board of directors, investors and so on? Who has decision making authority or control? And the most important thing to give an extra concern is the deal, the startup offers you. You need to pay an extra care to the structure of the deal as what would be your share of ownership against the money you invest, what powers you will enjoy and so on.

Thus, investing in a startup is not that easy as it seems. The factors described here are just the most important ones. Apart from these, there are several other factors to research before making an investment in a startup. Some of these are: Researching the startup’s Profit making capability, Scalability/ market size and Product-Market-Fit (PMF), reviewing its Plans for Future Funding and its Adviser List, Investigating the Financials, Assessing the Monetization Strategy, Checking the Cap Table and so on. Most importantly, the business relations always prove to be beneficial than all the facts and figures. Thus, give the most importance to – who has recommended you this deal.

Leave a Reply

© 2018 Campfire.