So I am planning on buying shares of an early startup which is doing an internal round funding and I got the opportunity to invest. This is my first time investing and would want to know what are things to consider and what I should ask the startup for before I hand in a cheque.
-Do you believe in their vision?
-Would you leave everything you have to work with them to make their dream come true?
-Do you have strong data that tell you that what they say will happen it's true?
-Do you think the founders are the best to accomplish what they are going for?
-Is it everyone in their team in love with what they are doing?
It's important to take in consideration the legal/boring part of investing, but it's not the most important. As betting on horses, there will be only one that wil win (in their space).
Are you beating for the right one? Ask yourself that. And stand along your decision
I've been on both sides of the table - as an entrepreneur that has received external funds twice, and as an angel investor putting money into 8 early stage startups.
Best to break into 2 sections: a) the business itself and b) the actual investment deal on offer
You'll always find risks when running through it - but that's the nature of these things. They're trying to build and de-risk in stages which is why they often need the cash. Earlier you invest, the less that has been proven. So just bear that in mind. Things you want to look for:
1: Why does the business exist - is it a good enough reason and solving a real customer problem? (ideally a painkiller not a vitamin; nice to have)
2: What does the market look like (size and growth) and what opportunity have they identified within it? Is it a bit enough sector that they're addressing.
3: What's the product / solution they believe takes best advantage of the opportunity outlined in (2)
4: Why that team and now? What's so good about the team doing it and why are they the best people - do they have something special which gives them more of a chance than another team? Can they execute quickly and beat off the competition? Make sure they've got the right mix (tech, product, sales /biz) and that they're all fully committed and not half -arsed (doing jobs on side)
5: What do the business economics look like. Have a glance at forecasts but they will only really know the next 12 months and are guessing the rest. Look at the levers / drivers of growth instead and see if they are realistic... e.g. if revenue will grow 30% - what drives that revenue - higher order value for example.. if so how will that be increased and does it sound reasonable..
1: I usually expect that I'll get diluted by 1/3 and then 1/3 again at some point.. so I'm always asking "what if they grow to £X revenue over 5 years" - how much % would I have then and is that a decent return. Often you can say "I think they're 30% likely to get there and divide your numbers by 3 to factor in the risk"
2: Are you getting the same share rights as the other investors -make sure you are. Nothing is worse than a VC coming in and getting "preferences" over your stock (i.e. they would get their money back first in any sale event and only after that would it all be distributed equally)..
3: Are the other investors well thought off and highly sought after... if they've done their due diligence and believe in it - that's a very strong signal. Make sure a good % are following on if there has been a previous round too
4: Be careful with the valuation as a lot get hyped these days. The higher the valuation - the more risk the company should have reduced. If you see a high risk, very early company with a large valuation - be very wary.
Hope this helps - very happy to go into more detail over a call if you like.
1. Existing valuation of the company
2. Methodology adopted to reach the valuation
3. Nature of equity on offer (Sweat etc)
4. Probable exit plans
5. Proportionality between additional shares that may get pumped into the system, taking total number of shares increase, and proportional increase/decrease in your percentage.
Hope above helps!!
A few more details are necessary...
-what do they make/do?
-who is their target market?
-how do they intend to engage with that market to generate sales?
-what revenue do they plan for? Is that realistically achievable or "it'll go viral" pie in the sky?
-do they have customers, paying customers, already? (this is a key indicator for you).
As people are suggesting, you should do good due diligence. This would talk a long time to answer well. Finding others who have invested before and getting perspective can be helpful. One place to start besides local startup groups is the book by David Rose called "Angel Investing"
it outlines some of the process of due diligence at an early stage Startup
I just read an article that is the BEST ADVICE on this topic I think you will like. "A Dozen Things I’ve Learned from Don Valentine about Venture Capital and Business" http://25iq.com/2015/02/21/a-dozen-things-ive-learned-from-don-valentine-about-venture-capital-and-business/
Without more details it is tough to answer specifically. But you should ask yourself can you stand to completely lose the amount of money you are investing? Is the startup engaged in something you are passionate about? Is it purely a financial decision and you are looking for a strong ROI or do you have other reasons for investing?
Is the Idea World Changing
Do you believe in the Product/Service
Do you trust the people behind the Startup, what is their background business and personal.
Who is their target market.
Can it be scaled to large International Status
What kind of challenges are ahead
What kind of competition is there
What kind of return can you expect
What are your fears and can you address them
As Marcus Lemonis often says: there are 3 Ps: "People, Process, Product".
And would add, in that order and the first P = People is the most important.
The number of startups that pivot is uncountable, and process can be changed as well. But not the people.
Ask yourself -are they trust worthy not only in leading the company to the right place? Will they share information with you after you invest or will they make sure to make all the decisions alone?
I've seen great ideas falling apart in the hands of the wrong people, so make sure that the team in this company is right for you, right for the product and right for the market.
After researching their history, would you buy a used car from the founder(s)?
Do you understand their marketing story and believe in it?
Cut their earnings forecast for the next 3 years in half ... would you still invest?
Will you be comfortable with your rights as a shareholder compared to others?
What are the exit options?
If you feel unhappy with one of the answers to these questions: don't buy
It's nearly all about the people if the startup is early stage.
- Do you believe in their ability to execute?
- Are they transparent and communicative (do they listen?)
- Do they have the appetite to deliver on their vision and have a sense of urgency about them to do this?
- Are the co-founders complementary in their skill sets?
- Is the CEO a leader? they don't have to be Fortune 500 material, just able (and willing!) to delegate, hire and inspire.
Yes you need to check the companies basic documents, due diligence, ensure the valuation is not crazy etc etc, but at the early stage it's really all about the people disproportionate to anything else.
If there is ONE other thing which isn't directly people, it's do they understand where this investment round takes them to (most often, another investment round) so are they raising enough money to give them enough runway to deliver on whatever is needed in order for them to raise another round of funding; in a seed or angel round very broadly that's usually 18 months of runway (as they'll have to start raising again after 12 months).
The number one thing to consider is the founder him/herself. Is this person smart, hardworking, and ambitious? If the answer to any of those questions is no, don't invest into his/her venture. If the answer is yes, then learn more about the business idea, the vision, the potential for growth and profitability, etc.
Startups will always make mistakes. That's okay. But if the founders believe in what they are doing and have the work ethic, intellect, and a forcing driving them forward, chances are that they will succeed.
A face-to-face meeting with the founders is very useful.