Investment in start-up companies can be dangerous. There is no clear checklist for a start-up investment success and there is no precise science behind investments in large and fast start-ups. But there are some rules that each investor needs to implement in order to reduce risks and avoid failing investments.
These are the seven rules for basic due diligence, which can help capital owners and investors get the most out of their investments:
- Take into account that 3 out of 4 start-ups will fail – for an investment- it is worthwhile to know that 75% of start-ups fail, and that’s when it comes to mature companies not companies in the SEED stages that the percentage of success is much lower. As a result, it is important that you have an exit strategy from an investment in a failing company. Most businesses tend to fail during their first year and with such high failure rates, it is important that you take every precaution to protect yourself and your fortune.
- Know when to reap your investment – you can always choose to keep a long-term relation with a company, but a successful investor understands that the market is a game of numbers and a game of numbers only. A business that is thriving in one year may fail next year because of a volatile change in the market. Knowing this, always pay attention and be aware of new trends and opportunities. Make sure you invest in new products, services, or brands to ensure a growing return on investment.
- Consider adding partners – most successful investors have partners that splits the investment, risk and return on investment. It helps to split the risk, but also improve the decision-making process. If two of your partners are not interested in getting into the project, you should think twice before investing in the company. If you do choose to go this way, select partners you trust and have history of successful investments.
- Invest only in promising teams – most venture capital investors will not enjoy profits within the initial 5 – 7 years of the investment. Risky investments are not a way to get rich quickly, this requires incessant devotion since start-ups that seem promising in the beginning of their path can fail. You have to be prepared for this. A good way to ease the likelihood of failure is to look for start-ups that not only having a great product or service, but they also have a great team. These are the types of startups that have a real future.
- Jump in at the right moment – timing your investment is just as important as the team quality you chose to invest in. You should only spend a few years in your business life to help minimize the risk. Make sure that the company has a business plan and a way to prove that they have experienced positive progress. A start-up that started and grew alone on its own is a start-up that can succeed alone in the future and will likely bring you a high refund on your investment.
- Market research – look to invest in start-ups that are going to deal with a big problem. It is important that any business you invest in is unique with a specific market. Seek proof that the solution is unique and preferable over existing alternatives. If there is a competitor in the same domain that offers a similar product or service, it is likely that the start-up company will fail and your investment would go to waste.
- Invest in the field in which you have an understanding – focus on companies that are in your specific expertise, so you can reduce the risk and better understand the business plan of the company. Moreover, when you invest in the niche you are enthusiastic about, you are in better shape to accurately predict the future of the company, analyze its risks and find potential areas for growth or improvement.
There is no precise science behind investments in start-ups, but these 7 rules will increase your chances to succeed as an investor. By tracking This list, you can identify which investment opportunities are worth your time and money or not. If the start-up meets the criteria presented above, you can perform a thorough due diligence through Targo.