Each year, entrepreneurs come up with millions of ideas for startup companies. Many of these ideas fizzle out before development while others have initial success but fail after a few years. While some startups appear to take off once they hit the market, only approximately 10% of startups succeed long term. They are many aspects to launching a successful startup company, but one of the most important factors is attracting the right investors.
Years ago, only wealthy people with a high net worth were given the opportunity to invest in new businesses. Title III of the JOBS Act made it possible for anyone to invest in companies for equity, but choosing to provide venture capital for a startup is a gamble. Whether you are a first-time investor or make a living by providing new businesses with venture capital, here are four things to consider to help you decide if investing in a particular startup is a gamble that will pay off.
What Protects the Company From Competitors?
Competition is fierce in the business industry, especially among startups. All startups are built with the premise of providing people with a service or product that will solve a problem or enhance convenience, so chances are slim that a company will succeed if it does not stand out from its competitors.
If the company is selling a product, make sure that it has a patent. This keeps rival startups from copying the idea. Even if another business offers a similar item, there should be something unique that makes your company’s product more desirable. If there is nothing to keep the startup’s ideas unique, it most likely will not be a good investment.
Similarly, if the company offers any kind of service, it must have a unique model to make it stand out from competitors. Potential clients should be able to see why this company is better than other businesses if it is going to be successful. If the business offers services that are too similar to another company’s model, it will not survive long term in the competitive business industry.
What Is the Market?
Determining the proper market for a startup is an excellent way to gauge whether or not it will be a good investment. Small markets cannot sustain a business, but large markets can be a lucrative investment. Investing in the market is equally as important as the business if you want your risk to pay off.
One example of an investor choosing companies with the right markets is Silicon Valley’s, Chris Sacca. After seeing potential and making early-stage investments in huge, successful companies like Instagram, Twitter, Kickstarter, and Uber, Sacca used his expertise to found Lowercase Capital, which overseas more than 70 successful investment startups. The investor now uses his financial expertise to benefit non-profit organizations such as charity: water, The Bail Project, and the ACLU. His tremendous success stemmed from recognizing the vast market potential of small startups and taking a gamble on these companies by making an investment.
How Driven Is the Founder?
When trying to decide if you should invest in a particular startup, it is essential to look at the founder instead of the actual idea. Gambling on a dedicated, driven founder is a much more lucrative venture than funding an idea that is not backed by the right person. Choose to invest in a person with the following characteristics to have an increased chance of success.
A founder who exhibits these qualities in addition to having excellent people skills is the best asset a startup can have. These characteristics ensure that the founder will do everything in his or her power to help the business succeed, making it more likely that your investment will yield rewards. In contrast, if a founder lacks passion about an idea, even if it is brilliant and satisfies a true need, the startup could fail due to lack of perseverance.
What Is the Business Model?
Does the startup in question have a good business model in place? How will it make money? What are its projected profits? How will it reinvest profits to grow the company? The business must have a strategy in place to help it grow to be successful. Not only will this roadmap help the company focus on accomplishing business goals, but it will also provide the business with the money it needs to stay afloat. If the business you want to invest in has no defined plan in place, there is a good chance it will succeed in the long run.
Investing in startups has the potential to be extremely lucrative. However, it is essential to thoroughly analyze the company in question before committing to an investment. If the startup you want to back has a solution to the four questions above and has a solid plan in place, it is more likely to succeed and yield an excellent return on your investment.