As an investor, conducting due diligence – or researching your potential investment – is something you should always do before you commit any funds. Of course, when you’re investing in a start-up, short of set up, projections and market research, there may be little information to check through. While this probably makes the process shorter, it in no way diminishes the importance of doing it.
In order to help you through the process we’ve put together a few key details you should always consider and research when you’re considering investing in a start-up.
Is everyone who they say they are?
If you’re using a crowd funding website such as Crowdinvest you will have easy access to all the details you’ll need to study, including the personnel behind the start-up. And, while Crowdinvest conducts its own, thorough due diligence, it doesn’t hurt to be 100% sure of a potential investment before making your decision.
So, list all the names of the relevant founding team of the start-up you’re interested in and either use the links provided on the pitch page or get googling!
Things to check out include:
- any social media posts you can see
- news stories on them if they’ve been in business before.
It won’t take long to ascertain whether or not the start-up team are who they say they are. Once you’re satisfied the new CEO and team are honest about who they are, you can move onto the next phase.
Or, if your considering making a substantial investment, why not contact the CEO? Initiate an email chat, arrange a call, or if you’re close by, meet up for a coffee. Any entrepreneur understands the importance of building a good relationship with his/her investors and should be keen to accommodate you. It’s also a great way of getting a real feel for how passionate they are about their idea and testing them on some numbers, projections and market knowledge.
Try to confirm some numbers
There should be quite a lot of figures in any start-up pitch so take a good look through them. Do your own calculations to make sure everything tallies – if it doesn’t, see if you can spot where simple mistakes have been made or if there is a deeper problem.
Again, any crowd funding platform should be on top of this but if you’ve found something you’re not happy with then bring it to the attention of the start-up, the platform or both.
If the start-up is already operating, then take to yahoo! finance or goggle finance to find more or verify information the figures that have been provided. It might seem like you’re repeating work already done by others, but when it comes to your money you need to be as sensible and sure as you can be before committing to ‘the next big thing’.
Do your own market research
Most pitches should contain a section on market research – why the start-up will succeed in its area and why it’s worth investing in. Do your own research on the sector the start-up is in.
- Does demand seem high or are there too many providers
- Does the start-up offer something new and different to existing competitors
- Is the pricing right
- Are the target demographics correct
- Is something new expected from a competitor that could damage the start-ups profitability
These are all important details for new businesses and investors who are hoping for a return on their investment further down the line.
Can the requested investment cover the start-up’s requirements?
Going back to those numbers, you need to know if the money being discussed is at the right level.
- If the investment is going to pay for rent on a new premises, is the estimate right?
- If it’s going to pay for a marketing campaign, how much do marketing campaigns cost?
- If they’ve allocated some funds for salaries, are they at the right level to attract and retain quality talent without being too frivolous and unsustainable?
- Can the new business create the product or service at the price they say they can and then sell it a price that will deliver profit and allow for future reinvestment as well as investor returns?
A thorough pitch will include details such as these so you should be able to follow them up with some online research to ensure it all adds up. Remember, even if you love the philosophy behind a new start-up, if the numbers don’t work then it’s not a risk you should consider taking.
It’s a necessary process for successful investments
Some investors get lucky and invest in the next big thing without having done as much homework as they should, but those instances are rare. What isn’t as rare is investors doing their homework and still making a loss or receiving a return on their investment well-below what was projected. When that happens it’s not always the fault of the business and tends to be down to unexpected developments or major economic downturns.
So, in order to try and invest in the right start-up at the right level for you, it’s definitely worth taking some time to do your own due diligence and find out more about the business you want to invest in.
Of course, any research you do undertake should already have been done by the crowd funding platform you’re using and your work will just be secondary, personal confirmation of key information that’s relevant to you. This doesn’t make it any less important and but means it should be a pretty simple matter of dotting the I’s and crossing the t’s before you go ahead and make your investment.