Table of Contents
Introduction
Investing in a startup can be a thrilling process – not only do you get a chance to support daring ideas, but you also stand to gain a lot of money in the future. However, without some preparation it is possible to make a wrong turn, so it is necessary to prepare. There are some important questions that one has to ask and receive answers to before putting their money into a startup. Here are seven questions that every investor should ask before putting their money into a startup.
1. What is the problem that the startup is trying to address?
First of all, find out what issue the startup is trying to address. This information is important in order to determine the potential of the market and demand. It is better to look for startups that are trying to solve major problems or meet real needs of people. For instance, a company which is aiming at enhancing the supply chain management in the e-commerce industry has a large market opportunity.
2. Is there a market for the product or service that the startup provides?
It is also important to determine whether there is a market need for the product or service that the startup provides even if the startup is trying to solve a problem. Carry out a thorough analysis of the market to determine the potential of the target market that you are targeting. Look for evidence of market proof such as early customers or partnerships with other organizations that are well known to you in order to get an idea of the potential of the startup and whether there is a market fit. Continue reading
3. What is the startup's competitive advantage?
It is always a competition in any industry. Therefore it is important to know what makes the startup different from other startups. Find out how the startup plans to sustain its competitive position, which may be based on proprietary technology, knowledge, or a strong brand or a unique business model. A strong competitive position may be an indication of better prospects for long-term performance. Continue reading
4. Who are the founders and management team of the startup?
The success of a startup is largely dependent on the talent of the founders and management of the startup. Find out more about them and their experience. Prefer people with industrial experience and success, and the right skills that are required to make the startup a success. A good and strong management team increases the chances of success. Continue reading
5. What is the financial position of the startup?
The financial health of the startup is a critical factor that determines the viability of the company and its prospects for growth. Analyze its financial statements, which include revenue, expenses, and cash flows. Some of the positive financial indicators include sustainable growth in revenues and good liquidity position. Also, check the financial history of the startup and if it has raised funds from reputable investors. Continue reading
6. What is the startup's growth strategy?
This is because a good growth strategy is very essential for the success of a startup. Learn about plans for increasing sales, acquiring new clients, and expanding into new markets. It is a positive sign that demonstrates that the growth strategy is well defined and realistic and matches the opportunities in the market. Continue reading
7. What are the risks that are implied by the investment?
Any investment decision is never without some degree of risk, especially in the startup context. Determine the risks which may include competition risks, regulatory risks, risk of technology disconnect, and implementation risks. Find out the what are the worst case scenarios and how much you can tolerate the losses. To some extent, it is also possible to mitigate some of the risks that are associated with investments through diversification. Continue Reading
