This was an interesting question that came from an online forum. Our editor’s response follows:
The first thing to look for when investing in a start-up is the product or service. The legendary investor Warren Buffet is quoted saying “Invest In What You Know”
Mr. Buffet loves the products and services of the companies he invests in. The same rule applies to investing in businesses big and small, and even startups.
In some cases, the product or service may be so groundbreaking that the investor (you) may not really understand it. In that case, you need to lean on a friend/colleague or trusted advisor who can help you with vetting the venture.
Of course, Startups come with unique challenges since they need to be nurtured as they grow. A few additional things you need to look at include:
- Founder profile – Investing in a startup requires an element of trust and transparency since the investment is not as regulated and secure as other investments. Therefore, you need to really understand and engage with founder/s. How well do you know the founder? What is their incentive and motivation in starting the venture ? Is the founder a go-getter ? Can he execute on his/her vision?
- Business plan – you are investing in a venture. A venture needs a plan – however simplistic – to indicate how it is going to scale and grow … and eventually make money. Some founders may not have documented a business plan but as an investor, you should try to draw out basics of
- Market and competitors – Is this a greenfield market or an improvement of an existing product or service? How big is the potential market ?
- Your personal engagement – Investing in a startup is not for the faint-hearted or for those looking at passive returns on investment. Investors (you) need to be engaged with the Founders and may even have to mentor and guide them.
- Thinking beyond money and investment – What additional resources will the startup need? Do you have other connections/network that can help the startup grow?
Check out a link to an earlier topic