Startups Blog

Startup Due Diligence - 5 Questions You Must Ask Before Investing

Investing in startups is not necessarily as simple as it may seem. After all, as with any investment, you will need reassurance that you can see a return. While many ventures offer great confidence in the here and now, there are still some questions to ask.

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What is the Level of Investment Required?

Before placing any money in a venture or product, always ask the big questions first. You will need to know what the big picture is for your money. If a company is vague on how much they may need in the long term, press for a round figure.

It is better to establish the monetary expectations upfront. Otherwise, this could lead to a fraught relationship between founder and investor further down the line. Establish clear checkpoints, and set up your boundaries, too.

What Time Frames are in Place?

Before any startups take money from you, it’s essential to see a plan. All promising ventures will precisely map where money will go and when. What’s more, they should also have a growth plan in place that you can easily track and monitor.

With precise time frames, you can be sure when you can start expecting returns. And - speaking of which…

What is the Expected Rate of Return?

This is a question that your prospective venture will need to be very open about. What’s more, they must be open to erring on the side of caution. A company that sets a conservative rate at the start of a project will appeal to many investors.

Be sure to inquire about the minimum potential for return on your investment. Clearly establish the pain points should returns be lower. Identify the risks, and ascertain whether or not the company in question is realistic.

Can the Company Diversify?

In an ever-changing global marketplace, diversification and the ability to pivot are golden. Many companies, however, stick to what they know and barely diversify over years of trading. That is why it is crucial to lock down a firm that is willing to transform should they need to.

It’s crucial to balance this stage carefully. You should gain confidence from a company that is tight to their niche and sphere, yet open to change. Any founders too conservative or too cocky in this regard may get a shock in times to come.

What is Their Exit Strategy?

Finally, again, it’s time to ask your company to be realistic. An exit strategy doesn’t need to establish that a company is ‘giving up’. Far from it - it’s a realistic concept that identifies what a founder wants to do long-term. Do they envisage selling the brand, growing it globally, and passing it on - or do they have an emergency clause?

These are all key points to remember before investing in startups across all spheres and niches. Be sure to set your boundaries - and start hunting down intriguing opportunities via Fundz.

 

SOURCES USED

https://www.investopedia.com/articles/investing/011916/5-questions-ask-investing-startup.asp

https://www.growthcapitalventures.co.uk/insights/blog/26-questions-to-ask-when-investing-in-a-startup-business

https://dfi.wa.gov/financial-education/information/questions-ask-investing-business-opportunity

https://hbr.org/1997/11/to-diversify-or-not-to-diversify

https://www.allbusiness.com/10-questions-to-ask-yourself-before-investing-93830-1.html