Are you looking for your next or first, investment opportunity? Does the thought of investing in a new startup or an entrepreneur seem exciting? It is! While it is different from traditional investments into stocks and bonds, this type of alternative investment can offer great rewards and ROI. The question is, how do you find the right startup or entrepreneur to invest in?
There is no magical technique that will guarantee you a successful investment strategy. Like any investment, this too comes with risks. However, we have some tips to help you build an investment framework that works for you.
Value proposition refers to a business or marketing statement that a company uses to summarize why a consumer should buy a product or use a service. Before you consider investing in a startup or a new product, you need be familiar with its value proposition, and believe it. Once you understand the value proposition, some other things to consider are:
- What is the company or product’s competitive advantage?
- Is the product or service customer centric? That means it has to be something that makes a customer’s life easier or solves a problem.
- Is the business easy to scale up?
Keep in mind, if you’re dealing with a tech based product or service, to ensure that there are proper intellectual property protections in place, or the business can be copied very easily.
Identifying the competitive landscape in which a business will operate is identifying its direct or indirect competitors, their mission and vision, strengths and weaknesses. Other important aspects to pay attention to are, market size, market structure, number of players, need for the unique product, regulations, exit opportunities etc. It can be difficult to find all the relevant information, but anything to find will help you understand what challenges your potential investment is likely to bring. Two aspects to always consider, in the early stages, and which are fairly simple to decipher are:
- Exit Opportunities: As an investor you care about the company you’ve invested in, but you’re also looking for the next big idea. Define a position for your investment, how long you’re going to stay in, and at what point you’re going to get out.
- Regulation: What are the laws and regulations concerning your potential investment. There is usually information available on what laws are in force that could affect the company and its products or services.
One of the things that investors don’t always consider seriously is the company’s culture and its leadership team. It is important to note that these are not always necessarily aligned. Culture is a company asset, and can often be costly, although crucial in the long run. Loyalty, engagement, and collaboration are drivers to success. Therefore, as an investor, you should evaluate whether the leadership team is the one protecting its key assets.
Assessing the leadership team is also important. You have to consider factors like, how many founders are there, and how many people are involved in making the business decisions. The more stakeholders that are involved in the day to day running of the business, the slower the decision making process will be. A company with 2 or 3 decision makers at most, is ideal. Another factor to weigh is how much experience does the leadership team have? If they are new entrepreneurs, then how much involvement will you have to have in the company to push it to success? If you’d rather take a passive investor role, then you need leadership with experience you can trust.
In the early stages, startups tend to pivot, when they need to move from a proof of concept to a scalable business. While business plans are helpful, one cannot believe that they are written in stone. Projections are just that, projected. Not everything goes as planned, even in the best managed businesses and human error is always a variable factor to keep in mind. Therefore, business plans should be assessed and adapted where required, and as an investor you need to know whether the management is open to change or wedded to a business plan.
There is no secret sauce to investing in the next big thing. No metrics to check off to make sure that you’ll get a return on investment. Trust your judgment and work with the people you’re comfortable working with. It is not possible to eliminate risk, but using the points above can help you minimize it.