Ask These 6 Questions Before Investing In a Startup

Ask These 6 Questions Before Investing In a Startup

Be sure to do your due diligence before investing.

So you want to invest in a startup? Great! But, before making any decisions, be sure that the company is worth it. There’s no guarantee that the company you are going to invest in will succeed. There are many factors that can make or break an investment opportunity with high risk-reward potential, including team, product vision and roadmap development along with financials. So, before you make an angel investment, become a venture capitalist or invest in a crowdfunding campaign, you must first analyze an investment opportunity. In order to make an informed decision, you need to ask yourself a few essential questions to decide whether to invest (and how much to invest) in a startup or a company.

Here is a list of a few key questions to ask while evaluating an investment opportunity.

Are you hit by FOMO (Fear Of Missing Out)?

Are you afraid that you might miss out if you don’t purchase or invest in this powerful financial product or startup that’s gaining popularity all over the internet? The startup scene is always full of new and innovative ideas, and it can be tempting to want to invest in the latest technology or products. However, according to wealth manager and behavioral finance expert, Shari Greco Reiches, FOMO makes people take on riskier investments. Especially when you see others reap great profits, you feel the urge to partake in the opportunity, even though deep down you know most of the big rewards have been harvested. While there may be instances where you can still make a lot of money by investing in a startup, it’s important to do your research first and understand the risks involved. Otherwise, you may end up losing a lot of money chasing after the next big thing. 

How much involvement is required in the startup?

The level of commitment required to invest in a startup is directly proportional to the type of investment. For instance, if you invest in a startup’s crowdfunding campaign, you usually invest in a much smaller amount and thus earn a smaller equity stake and very little control of the company. If you invest as a venture capitalist, you will likely have involvement with the startup’s management team, as the money is pooled from large corporations, pension funds or through investment companies. On the other hand, an angel investor evaluates a different scenario, as they invest with their own hard-earned money. In other words, angel investors are responsible for their own money, whereas venture capitalists are accountable to their investment partners. 

It is important to be transparent about your expectations when investing in a company. You might have different responsibilities based on what kind of investment you’re making, so it’s best to consider how much commitment and time you want to “invest” alongside your capital.

What are the risks and how much can you tolerate?

When it comes to startups, there are always investment risks involved. Many startups fail within the first few years, and investors can lose their entire investment. Therefore, before investing in any startup, it’s important to understand what those risks are. Are they regulation risks? Or market- or competition-related risks? 

Once you determine the risks involved, it’s important to determine your risk tolerance. If you are investing with disposable income, where a loss wouldn’t affect your lifestyle, the potential upside may be worth the risk. However, others may prefer to stick to more established companies. Ultimately, it’s up to you to decide what’s right for you. While the risk of failure is always present when investing in startups, the more you understand the investment risks, the better equipped you are to make informed decisions.

How does this investment fit into my overall portfolio?

When it comes to investing, there’s no shortage of options to choose from. But with so many options, it can be difficult to know where to begin. That’s why it’s important to ask yourself how each investment fits into your overall portfolio. For example, if you’re looking for long-term stable growth, investing in a startup may not be the best option. On the other hand, if you’re more interested in generating high multiples on your investments, startups may be what you’re looking for. 

What happens if this investment fails?

When it comes to startup investments, there’s always the potential for failure. But what exactly happens if your investment goes wrong? There are chances you end up losing some or all of your initial investment. Depending on how much you’ve put in, that could be a serious financial setback. Make sure you are able to handle the potential fallout from investing in startups.

What is the company’s history?

It’s always a good idea to do your research on the company and see how they’ve performed in the past. Have they had any major setbacks? Or have they been consistently growing? The answer may tell you if they’re stable and have been around long enough so that their success can be attributed solely to this factor, or whether there were any periods of financial struggle which could point out potential problems for future growth? This can give you a better idea of what to expect in the future. 

Money is hard-earned, and it must be invested wisely, cautiously and strategically at all times. Therefore, remember that no question is a stupid question. So, make sure to ask as many questions as you want until you’re convinced.

Happy investing!

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Header image courtesy of Freepik


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