Before you invest in a small business, do your homework.
Small Business Administration statistics indicate that more than a half million new businesses are started each year in the United States. These entrepreneurs will spend, on average, 33 hours seeking credit. In addition to turning to financial institutions, they often look to other sources, such as family members and close friends.
Investing in a startup can be a lucrative investment, personally satisfying and really exciting! It’s wise, however, to move slowly and conduct the appropriate due diligence.
Forbes.com recommends these important tips when you have the opportunity to get in on the ground floor:
Invest in a familiar market.
Do you understand the business model? You’ll reduce your risk if you have a better sense of the venture. Make sure the business has a scalable model so it will grow to a level that will allow you to recoup your investment.
Diversify your investments.
Rather than investing in just one company, make multiple investments, which will increase the possibility of success.
Do your homework.
The people who will be running the company will be the most critical factor in its success. Do you know them? Do you trust them? Look at their work history, education and experience. Determine the value each brings to the table. Ask yourself if you really trust them with your money.
Explore the market.
Research what competition the new company will have, as well as any competitive advantages it might have to get ahead of other, similar companies. Make sure the founders are focused on customer development and are getting good feedback about their product or service.
Investigate the financials.
Do the founders have a blueprint for profitability? How are they using the funds they already have? Take a look at starting salaries, additional funding sources that may be available and how much money is going into research and development.
Review the legal documents.
Look at articles of incorporation, by-laws (if applicable), investor agreements, etc. This will help you become familiar with how the company will be structured and who is involved and to what degree.