Investing in a startup company is an excellent way to win big. An early investment can earn you equity in the company. If the company is successful, you could receive a huge payout when the company is sold. However, if the company fails, you could lose all your money. So, how do you tell if it’s a good idea?
Properly Value the Company
The first step is to determine the company’s current worth. What are the company’s current assets and liabilities? Do they have all the hard assets needed for launch? What intellectual property do they have? Is the company making a profit? A bad answer to any of these questions isn’t a deal breaker, but you should keep these things in mind. For example, a company with a large amount of liabilities that still must acquire significant assets before being able to launch a product or service is not a company that is likely to succeed. In this case, you should either withhold your investment, or ask for a larger share in equity.
Seek Outside Opinions
It’s a good idea to seek an outside opinion before handing over any money. There are benefits to consulting with an attorney before you buy a business. In this case, an attorney can help make sure that the company is conducting business legally. The attorney can also help make sure that equity is legally transferred to you. You should never hand over any investment money without some sort of contract. Doing so could result in you getting nothing even if the company is successful.
Consider the Pain
Companies are founded on pain. To sell a product or service, a consumer or other business must be dealing with a problem so painful that they are willing to pay to have it solved. Before investing in a company, ask yourself. What pain are they solving? Is it a major pain that a lot of people will want solved? Does the startup have a unique solution to this pain? The pain that the company is solving should be like a shark-bite. If the pain is more like a mosquito-bite, chances are that they will be unsuccessful.
Getting answers to all your questions is going to take some serious communication with the startup founders. As you determine the viability of the investment, you should also consider the ease of which you communicate with your investors. You need to be able to trust the founders. Look for people that are easy to get ahold of, answer honestly, and are willing to admit their own faults.
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