What To Look for When Investing in A Startup?

Check These 13 Indicators of Legitimacy. 

The Theranos story is a great reminder to always do your due diligence before investing in any company. A legitimate business venture should have nothing but integrity, while an early-stage startup may be full of potential but it’s important not to get too excited about this prospect until you know more information on how they stand apart from other businesses and whether there’s money coming off their sales or grants available.

There are a number of factors that one must consider before investing in any company, but there is no doubt it can be difficult to tell whether or not your investment will pay off. To help ensure success and protect yourself from financial loss due to misinformation about startups, 13 Forbes Finance Council Members share details regarding what investors need to look out for when assessing potential opportunities:

1. The Skills of the Team 

Investors who are interested in the unicorn game should know that this is not a hunt for mythical creatures but rather an opportunity to get acquainted with teams and see if they have what it takes. When investing, one must consider how much skillset development or funding is needed depending on the stage of the company’s life cycle from startup to later stages. – Jeff Grobaski, Epic River 

2. The Track Record of the Founders 

You’re investing in the founders, so you want to know their track record. Do they have any previous failures that might indicate an inability or unwillingness to pivatet? You also need to look at team strength and what obstacles these people have successfully navigated before deciding whether this is a good opportunity for investment 

A lot goes into choosing which startup ideas are worth funding – including looking at how successful each company was once upon its creation. – Randal McLeaird, Ridgeline Investment Group 

3. The Energy of the Business 

Do you know when you have that gut feeling? It’s not just your mind playing games with you, it really is an intuition. Listen to those instincts and do some research on the founders of a company before investing time or money in them. Make an internal checklist that can tell you when something is wrong. These immeasurable qualities might be a strong indicator of a startup’s legitimacy. – Amanda Dixon, Barney 

4. The Internal Qualities of the Leader 

Leadership is the key to success. It’s important that you find someone who has a hunger for knowledge, humility, and intelligence combined with smarts in order to achieve great things together. Don’t forget the “humility” aspect, which has been a major cause of the failure of many excellent ideas and thought leaders. – Darryl Lyons, PAX Financial Group, LLC 

5. The Data of the Company 

The data you get from the company can tell a lot about its authenticity. Is there an actual track record? Are these numbers logical and reliable, or are they just made up so that people will buy into what they’re selling? You should also look for third parties who ensure credibility in this industry because without them we might as well be talking hearsay – Russ Zalatimo, HUDSON POINT capital 

6. The Market 

The most common mistake made by new companies is overstating the size of their market. Even if a startup outperforms the competition, it’s difficult to scale a business from a small firm to a large corporation in certain niches and industries. As a result, it cannot be understated how important a large and developing market is for startups. This will decide if your investment is worthwhile. – Mara Garcia, Phonexa Holdings, LLC 

7. The Weak Link 

Pass if you can’t pinpoint the weak link in the chain. The Theranos appeared to be an excellent one in theory, and the business model looked to be very promising—as long as their technology worked. But it didn’t, so now engineers can tell us why not only did this happen but also what went wrong. On average investors probably would have been lost without an expert on technology. – Todd Sixt, Strait & Sound Wealth Management LLC 

8. The Management Team 

When investing in a startup, make sure to look at the management team. What history do they have? Where can you see tangible results from their involvement with this company and how long has each member been working together as one cohesive unit?” Look also for an equally engaged team. Consider it as if you’re recruiting employees: Are these the individuals you want to work for you? – Jared Weitz, United Capital Source Inc. 

9. The Physical Operations 

When you invest in a startup, it’s important to get eyes on the company’s physical operations. Physicality means finances are difficult to fake but brick-and-mortar stores can actually be fabricated harder than people think. – Glenn Hopper, Sandline Global 

10. The Customers 

It’s important to get the feedback of real customers on your product before investing time or money into it. Make sure you ask at least two active clients whether they plan to renew their subscription and if not, why? It would also help during these conversations if potential buyers paid full price instead of being given discounts. If not, you’ll have an inaccurate perspective. – Aaron Spool, Eventus Advisory Group, LLC 

11. The Founder’s and Leadership’s Drive 

It’s not just about investing in a startup; you are actually backing their vision. The leadership team is second. Are they seasoned and eager to go? Is this their first rodeo, or have they been doing it for some time? The founder and leadership team are what keep a business going, so seek for high EQ combined with the ambition and energy to shape the idea. Projections are critical, but leadership to create them is even more essential. – Cynthia Hemingway, Fourlane, Inc. 

12. The Cash Flow 

Investors should make sure to monitor a company’s financials and look out for any red flags. If an owner is improperly collecting payments from their clients or not spending enough on important tools research, then they might be bad investments. – Nick Chandi, ForwardAI 

13. The Capital Invested to Date 

In order to ensure the success of your investment, it’s important that you know how much capital has been invested as well as who prior and future potential investors are. The structure and valuation also play critical roles in setting up an enterprise for long-term growth because look out there is no room left on this earth! Look for partners with a good track record who will be able to build a pathway towards liquidity while generating a decent return on Investment. – Peter Goldstein, Exchange Listing LLC 

When investing in a startup, it’s important to look at a variety of factors in order to make an informed decision. By considering the weak link in the chain, the company’s physical operations, its customers, and the founder’s and leadership’s drive, you can increase your chances of success. It’s also important to monitor a startup’s financials and make sure that you understand the capital structure and valuation before investing. Doing your due diligence can help you avoid making a bad investment and increase your chances of success. 

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