In the world of investing, there are numerous investment opportunities from which you can choose. The market is saturated so you will most certainly find a suitable investment opportunity that will match both your investing style and preferences. But your question will be about how to assess whether a startup is suitable for investment.

When it comes to different investment opportunities, investing in startups and small businesses is something that became popular fairly recently. That being said, this market seemingly exploded with interested parties looking to make smart investments and thus secure their financial future.

Therefore, if you are also looking to invest in a startup in hopes of either generating favorable ROI or securing your financial future in any other sense, here are some of the factors you will need to consider beforehand to make sure that you have made the right decision.

The Initial Considerations

Before you decide to invest your capital in any business, and especially a startup, you should first schedule an interview with them. This way, you will get the chance to see and hear people you might potentially end up doing business with face to face.

Furthermore, this way, you will start building a relationship with the people early on, which can mean a lot later on if you decide actually to invest in their business. Finally, show them what smart capital means to you. Make it clear that you value investing your time and effort into them, as much as you do money.

businessman looking at the latest stock market news by checking resources such as AskBrokers market talk on his mobile

The Objectives and Strategy

Next, once the initial meeting is over, you should ask them to present to you their business’s objectives and strategy. They should show you their organizational goals and expected outcomes during this process, as well as their key business metrics.

Among the first steps that will build a foundation will be these key metrics. You will base your decisions about whether to return to a particular venture later on — when it comes the time to decide whether to invest or not.

The Pitch

The pitch is the thing that will either kick-off or shut down any further collaboration. The fact of the matter is that a startup needs to truly convince you – the investor – that they are a favorable investment opportunity. A startup should show the investor what to expect as far as the desired success with their business efforts.

Of course, clearly defining the time and date for the pitch and keeping it as formal as possible always helps. Additionally, some of the most relevant questions to ask during this process include the financial questions.

You will ask how they intend to handle finances during both the good times and the bad times. You will pose questions about social proof – and if there’s an audience interested in buying their products. As an investor, it is critical to understand the startups hiring service practices.

Always obtain the answer about where they see themselves in five years – because this is usually the timeframe in which a startup should be able to reach (investor-worthy) success.

Be Careful

When this part of the process is concerned, there are some mistakes you need to avoid. First and foremost, if a startup wants you to sign an NDA before sharing any sensitive business information with you, don’t take any action with them.

Also, if they don’t seem motivated or aggressive enough to make a place for themselves on the market, it would be best to simply continue your search for a better candidate.

The Information Exchange

Once you have seen or heard the pitch, you will be able to clearly define your venturing goals. Decide how you will engage in the entire investing process and begin the information exchange.

Ask for all the crucial information regarding the startup’s business. You will want the pitch document, business model, organizational chart, customer information, and sales references.  Vital is the financial information and the description of products and services, as well as all other legal documentation.

The Startup Maturity Level

Take time to consider is the maturity of the startup for which you intend to invest. Generally speaking, startups are particularly tricky to assess. However, you should pay attention to operational efficiency and the potential to scale the business further.

Note where the potential is to grow the startup’s team and establish a certain market position. It’s advisable to stay up to date with all the latest stock market news by checking resources such as AskBrokers market talk. Take note which industries are currently in high demand.

The Venture Validation

Next comes the venture validation. In this step, you should validate all five criteria of venture validation before you decide to invest. The requirements are as follows:

  1. Problem validation – or the size, timing, and opportunity.
  2. Solution validation – or is the differentiation strong enough?
  3. Business model validation – or is the business model both scalable and viable?
  4. Strategic fit – or does it comply with the organization’s strategy?
  5. The team – or the team’s ability to execute, as well as their mindset and composition.

You’ll need to know who you’re looking to validate. Take a look at the business and map out the criteria you are going to base the evaluation on. Define the relevant data and results based on which the “who” will either pass or fail your validation process. Once all of these are validated, you can move onto the next step.

businessman doing venture validation

The Venture Valuation

This step is particularly tricky to tackle, especially when startups are concerned. Evaluating mature companies is fairly straightforward — since you have all the necessary data at hand.

Evaluating startups is most commonly based on not only trying to assess money but also the energy that goes into it. That is why it would be best to ask for expert help with this step to ensure that you have made the right choice.

The Investment Criteria

When it comes to investment criteria, you need to make sure you have covered the “who” “how” and “what” of the entire process. The “who” part focuses on the people in the startup – the founder, the team with the necessary experience and the skill set required.

The “how” part focuses on the business itself – defining the target audience, coming up with a product or service. Designing with that target audience in mind, having a clear market demand and a clarified business model will breed success. 

Also, keep in mind the presence of earning potential, sustainable competitive advantage and potential market share. Finally, the “what” is focusing on the questions regarding the list of top customers, strategic relationships. Suppliers need to be considered, as well as on the thorough analysis of the competitive landscape. Understand and clarify the current value and identified key risks that are involved.

co-workers analyzing the investment criteria

The Final Decision

Once all is said and done, all the necessary conversations had and all the crucial documentation and data presented, there comes the time to make your final decision. Aside from all the evidence, another thing to consider here is your gut feeling.

Everything you are presented with might look like a perfect investment opportunity, but sometimes if the things look too perfect, chances are that there’s something wrong. There are many issues that you can simply miss without expert advice, so,  your gut feeling may be the final factor for you. 

If it’s telling you to go for it – what are you waiting for? After all, it is your money and future success on the line, and you should definitely be very careful and cautious with it.

Jessie Connor

Jessie Connor is a passionate writer and researcher from Brisbane, contributor at several business and lifestyle blogs, hooked on yoga and healthy living. She loves to spend her free time travelling, reading and of course – shopping!