6 quick questions to ask before investing in a start-up
Investing in start-ups is ‘hot’. Before you decide to invest in a start-up it's important to ask yourself a few questions. It is not impossible to predict the risks and chances when it comes to start-ups so we recommend to be well-prepared before taking this step.
1. What is a startup?
A start-up is a starting company, but a starting company isn’t always a start-up. How does that work? Although there is no real definition of the word start-up, a start-up is seen as a company with an innovative product or idea, which is scalable and repeatable. New, innovate technology is also often used and continuous improvements and alterations in the product are essential. A start-up can be a company without any revenue, the so called ‘idea’ or ‘seed’ fase .
2. Is the start-up team trustworthy and experienced enough?
If you invest in a start-up, most of the time you will be investing in an entrepreneur or a team of entrepreneurs rather than the idea. It, therefore, is very important to know and trust the people who you are going to invest in. Do they have the personality and skills necessary in order to turn the company into a successful company?
3. What am I investing in?
Apart from the above, the idea, the concept, and whether it appeals to the market is also a crucial factor in a start-up. Does the idea appeal to you and do you expect it to be successful? Do you think that the start-up provides a sufficient insight into the opportunities of the product/service it will provide?
4. Why am I investing?
What is your reason to invest? Do you want a high yield at short notice? Do you want to be involved in an innovate industry and possibly take some profit for your own company? Do you mainly want to support the company because you’re sympathetic towards the people and the company’s activity and is profit less important? It is beneficial to ask yourself these questions in order to get an idea as to why you are interested in investing in a start-up.
5. Do i believe in the team?
Time periods are another aspect important to consider before investing. How long do you want to invest? Do you prefer a short period in which a ‘return on investment’ must be included, or can you keep the money within the start-up for many years? It is important to know this, in order for both you and the start-up know what you’re planning to do. Discuss this up front and make agreements, so any future misunderstandings will be prevented.
6. What if the start-up isn't a success?
Investing in a start-up is not an investment with guaranteed profit. In other words; it requires you to be adventurous and to have the courage to invest in a certain initiative, as it might turn out differently than expected. This is ‘all in the game’ and you must be willing to - and be financially able to - take this risk. Make sure to only use financial resources you can afford to lose.
When successful, however; the profit can be big, both in a material way and in an immaterial way. In addition; working together with a start-up often helps big companies to come up with new innovations and to get rid of old patterns. The start-up learns from the existing company when it comes to modesty and deliberation. In other words: If there is more than just a financial investment, the chances of a win-win situation will be high.