Sometimes, an investment opportunity will come along that looks absolutely unmissable. Everything about it seems to be spot on: there’s a clear demand for the product or service, nobody else out there is offering anything like it and there’s plenty of scope for it to grow. In short, this looks like the start-up you’ve always wanted to invest in, and when you talk to your friends about it, they feel the same way and urge you to take the plunge.
But hold your horses for just a minute. It’s really not a good idea to rush into a commitment to invest even if you love the underlying idea. In fact, that’s precisely when you need to have your wits about you the most. It’s all too easy to agree to investing in a start-up because it looks fantastic on paper. You are just asking for problems and even potential disaster. To avoid that fate, you need to aim a few sharp questions at any entrepreneur who’s after your cash:
What do you want back if you invest in a start up?
This is a question you should ask people every time: if they aren’t clear about their motivation, that’s a big, bright red, flashing warning signal. The same applies if they’re not fully committed to the project: start-ups that turn their ideas into continuing, solid returns are generally those headed by people who truly love what they’re doing. It’s true that you can’t win through in business with only passion, but it’s also very hard to manage without it. Satisfy yourself completely that this is a project that’s about more than simply turning a short-term profit.
Can you give me hard numbers?
Don’t hold back on asking for details of how their business plan will be funded; it’s your money they’re hoping to receive, after all. Ask entrepreneurs how they plan on moving past the initial growth phase and into longer-term financial success. Also press them for some details of how much of their own money they’ve put in. If they won’t take a risk with their own money, you really have to wonder about just how committed they truly are. You’re the person who needs a return on your investment; they’re the person who needs to know how to deliver it.
What could go wrong, and how would you fix it?
There is no such thing as a cast-iron guarantee in business, so be suspicious of entrepreneurs who have not thought about the possibility of things going wrong. The people behind successful start-ups don’t pretend risks don’t exist: they identify them and work out how to overcome them. Having an experienced team behind you really counts here, as people who’ve been through it all before, are likely to be more realistic about the challenges ahead. And don’t take “There is no Plan B” for an answer – ever. There should always be a Plan B.
If you invest in a start up who’s with you?
However strong-willed and clear-headed an entrepreneur may be, they’re not Superman and can’t do everything on their own. That means that the ability to build the right team around them is absolutely crucial – people who know what they’re doing, are utterly reliable and have the track record to prove it. For everything from identifying edges over the new business’s competitors, to explaining to other potential investors just why this is the start-up for them, a team that operates as a well-oiled machine is worth its weight in gold.
This article was originally posted on noobpreneur.com