I have been dispensing a fair amount of startup advice of late, mostly picked up from hanging around some pretty hardcore venture capitalists (VCs). This time I thought we could look at a little something for the not-so-seasoned investors out there.
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So, if you’ve got some spare cash lying around, you might fancy yourself an investor. You’ve heard a few startups pitch and you’re pretty sure that they are going revolutionise mobile/social/the web as we know it. You have the money and they have the killer power point so it is a marriage made in startup heaven.
That’s great, but before you jump into anything incredibly binding, perhaps you should consider a few things. After chatting to some VCs, they suggested at least a dozen things you should ask yourself before investing. Here are seven.
Do you like the founders and the team?
Who are these people who you are about to give your hard-earned cash to? When you are investing in a startup it’s not just the business you’re investing in — you are actually investing in the team. You need to make sure it is a team you can trust and most importantly that these are people you can work with. So get to know the people and make sure you like them (at the very least, a little bit).
What’s the industry like?
What do you know about the industry you’re about to invest in? It is important to invest in what you know and not get caught up in the hype around the next big thing. Because let’s face it, everyone is building the next big thing. So it may be wise to do some serious research about the industry to make sure you know what you’re getting into and not being swept away by some clever slides.
What’s the financial strategy like?
It may not be appropriate to talk about money in polite society but this is a money game. The business model may seem sound but have you really investigated the financials? Is the monetisation plan reasonable? Is it a price you, yourself would be willing to pay for the service they are offering? And most importantly, does this financial strategy make you your money back? These are some things that you really should have solid answers to before agreeing to back a startup.
What’s the competition like?
Does the company have competitive advantage and if not, how do you intend to fix that? You need to know who is competing for the same customer base. Why would the consumers use your startup’s service instead of the competitor’s? Could one of the competitors possibly buy your startup? You need investigate all these things.
Have you done some legal due diligence?
You need to examine the original contracts. What are the core terms the company was founded on? Who owns what and how much will you own in the company? Who has controlling interest in the company, and have you examined the legal documents that explain these terms? Has this idea been registered? Who owns the intellectual property? You have to make sure everything is on the legal up and up.
Have you thought about future funding?
What happens when the money runs out? Most internet-based startups, especially if they are social media-based, tend to concentrate on building their user base before they think about or focus on a monetisation plan. Do you intend to invest in a second round, and do you have the funds? If you don’t, have you thought about who the future funders could be?
Does the company excite you?
So you’ve thought of the above and the company makes sense on paper and the team seems like they know what they are doing. But are you excited about the company? Is this a company that has you talking about them all the time, one where you can’t wait to use their product/service? A VC once told me that he invested in product that didn’t make business sense, but he was so excited about it and wanted to use it so much that he had to find a way to make it work. So, does the startup excite you?
