13 Signs Of Legitimacy for Startup Investment
Before investing in a startup, an investor must ensure that it is a legitimate company venture that was founded by the book and that the founder can thoroughly explain and back up the statements they are making about the potential of their product or service as well as their current financial status.
There are critical elements to consider before investing in a company, even (or especially) one that is surrounded by a lot of hype, to protect your money and interests. A prospective investor should examine the following details to determine that a “promising” startup is authentic.
1. The Team’s Skills
While every investor wishes they could get in on the ground floor of a unicorn, unicorns are so named for a reason. Rather of pursuing a mythical creature, investors should spend time getting to know the team to ensure that they have the talents the company need right now. If you’re starting a business, you’ll need to be able to raise funds and create. They must be able to grow if it is a later stage.
2. The Founders’ Track Record
From the perspective of a venture capitalist, you’re investing in the founders. What is their previous track record? Are you friends with them? Is the team capable? What challenges or difficult situations have they overcome in the past that demonstrate their ability to pivot and find a solution?
3. The Energy Of The Business
Trust your instincts. What are your first impressions about the founders? What is their level of commitment to getting their product(s) to market? When you walk into a business, what type of energy do you get? Is there a quiet hum of anticipation? Are the personnel conversing with one another? Make an internal checklist to help you see any red flags. These intangibles can reveal a lot about a company’s credibility.
4. The Leader’s Internal Qualities
Leadership is at the center of everything. Ascertain that the leader is more than capable. Look for people that are “hungry, modest, and brilliant,” according to Patrick Lencioni, author of The Ideal Team Player. Don’t overlook the “humble” element, since a lack of it has led to the demise of many excellent ideas and thought leaders.
5. The Company’s Data
The firm data frequently conceals legitimacy (or lack thereof). Examine what’s going on with the company’s products and services. Is there any previous experience? Is the information reasonable and trustworthy? Is there a third party who can guarantee credibility?
6. The Market For The Startup
Overestimating the size of your market is a classic issue for businesses. Even if the entrepreneur surpasses the competition, scaling a business from a startup to a huge company is nearly impossible in some markets and products. As a result, the importance of a big and growing market for startups cannot be stressed. This will determine whether or not your investment is worthwhile.
7. The Weak Link
Pass if you can’t figure out the weak link in the chain. On paper, the Theranos story sounded fantastic, and the business plan appeared to be very appealing—as long as the technology worked. But it didn’t happen. The chain snapped. Engineers and physicists can now explain why it failed, but the danger was always present. The technology was perhaps beyond the comprehension of the average investor.
8. The Startup’s Management Team
Examine the management team of a startup before making an investment. What are the important players’ track records? Look for tangible results and inquire about their role in the organization. Look for a management team that is similarly invested and has a track record of accomplishment. Consider it like hiring new employees: Are these the folks you want on your team?
9. The Company’s Physical Operations
Don’t take pro forma numbers from a spreadsheet at face value. It’s a good idea to have eyes on a startup’s actual operations if you’re investing in it, especially if it’s a private placement. Financial statements are simple to fabricate, but brick-and-mortar activities are more difficult.
10. The Startup’s Customers
It depends on the stage of the business in which you are investing. Make sure you talk to at least two active customers if you’re presuming the product works. Get their honest comments on the product and whether or not they plan to renew and expand their use during that meeting. Make that they are a genuine paying customer who is paying full price. Otherwise, your perspective will be biased.
11. The Founder’s And Leadership’s Drive
When you invest in a business, you’re basically investing in the founder’s vision. The management team comes in second. Are they well-seasoned and ready to take off? Is this their first time out? A startup’s founder and leadership team are what make it tick, so seek for someone with a high EQ combined with the drive and passion to shape the vision. Projections are vital, but effective leadership is even more so.
12. The Company’s Cash Flow
Investors should pay close attention to how a company manages its cash flow and make sure the data are accurate. If a business owner isn’t properly collecting payments from clients, repeatedly overextends themselves, or underspends on critical equipment or research, they might not be a viable investment.
13. The Capital Invested To Date
It’s crucial to know how much money has been invested so far, as well as who the previous and possible future investors are. The investors, the structure, and the valuation are all vital to the company’s future success. Look for partners who have a proven track record, are aligned with your investment thesis, and can help you establish a liquidity and return on investment path.