Much like going to the grocery store and sifting through a mountain apples to find one without blemishes, identifying the perfect-looking company to invest in takes a good eye. To make your eyes a little sharper, take a look at these four ways to identify the perfect early-stage growth company investment…
1. Exit Strategy
Does a startup have a clear exit strategy in place? It’s important that you as an investor know how you are going to make your money back and at what timeline. Without a clear direction or plan to generate returns for you, the investor, there’s little reason to dive into the opportunity.
2. Clear Ownership
As an investor you must have a complete understanding of who owns the business and all of its intellectual properties. If there is any doubts regarding patents, copyright, or ownership of assets, your investment should be withheld until those issues are legally taken care of.
Some early-stage growth companies can make a splash early, but disappear in just a few short years or even months. Conceivably, this could still prove to be a solid investment – if there is a swift exit strategy in place. But ideally a company should be able to demonstrate that it can play the long game.
Founders must be willing to work with investors and be available virtually at all times. A company may look great on paper, but any working or financial relationship which could become destructive or stressful may not be worth investing in at all. There must be a mutual respect between founders and investors, each knowing their place in the company.
Culture is a bit of a buzzword in the business world these days, and for good reason. There’s no surprise in the success of businesses like Virgin and Nordstrom — corporate culture is a humongous focus in the boardroom. Before you invest and partner with a company leader, take a look at these three keys to identifying good corporate culture.
What is the “why” behind the “what” in the business? Having a purpose constitutes vision, and having a vision enables passion. Before you invest in the next Mark Zuckerberg, make sure he or she has these not always inherent qualities. This kind of attitude often has a trickle down effect — before the troops can be motivated, they must be led properly by their general.
More than ever, the ability to turn on a dime is crucial. Twitter once was a destination to find and subscribe to podcasts, Starbucks once exclusively sold espresso machines and coffee beans. Nokia made its earliest cash by churning out paper, Flickr was nothing more than a role playing game. At some point, these company heads decided it was time for a change. Be sure your partner CEO is open for a pivot if necessary.
3. Empowered Employees
Richard Branson once said “Take care of your employees, they’ll look after your customers. It’s that simple.” Finding that impeccable customer service is simply found by giving employees authority and responsibility. As Nordstrom’s employee handbook famously reads “Our One Rule: Use good judgment in all situations…” This kind of treatment breeds loyalty, which in turn lowers staff turnover.
The gates swing open and off go the horses. When you invest in a early-stage growth company, there are a lot of variables to consider, but at the end of the day, you want to make sure you have your dough on a well-trained thoroughbred. To help you do so, here are four amazing traits to look for before investing in a founder.
1. Owns Failures
People often avoid owning up to a mistake or failure, but if you’re about to saddle up your dollars with a company, make sure the founder is not one of these people. A good entrepreneur will never say “it’s my VP of Engineering’s fault.” Rather, they will take responsibility and truly learn the appropriate lesson and move forward.
2. Demonstrates a Sense of Fair Play
Scaling a business will put everyone involved in exciting, yet high-pressure situations, The most damaging thing a founder can do is to leave his own team hanging. The founder needs to step up to the plate as much if not more than the rest of his squad. It puts a very sour taste in the mouths of employees when they are asked to report at the office seven days a week with the founder nowhere in sight.
3. Has a Strong Sense of Economics
All good founders will have a strong sense of value exchange. When negotiating deal terms, a founder should ask what’s in it for me, and ask what’s in it for the other players. If the founder has a sense for win-win situations, you can almost be sure he/she has a shot to be competitive in the marketplace.
4. Not in Love With Their Idea
It sounds counterproductive on the surface, but markets and technology change all the time. What was great yesterday may no longer be great today. You want a founder who can keep an eye on changes and make the appropriate adjustments. So have doubts and challenge them each day.
It’s not an easy game to play. Startup winners can elude even the brightest of minds, but if one does manage to uncover the next Uber or Pebble Watch, that discovery can lead to significant high-yield returns on their investments. Here are five things you need to know before you find your next growth capital home run.
1. Stay With What You Know, Take Calculated Risks
The best way to reduce risk is to understand what you are investing in. That understanding will be able to provide invaluable insight to the mechanics of the business and the investment itself. Make sure that the business has a scalable model so that it can grow to a level in which you will be able to get your money back as an investor. Long-time startup investor Kevin O’leary of Shark Tank says “I like to take risks. That’s how I make money. But they are calculated risks.” Take risks — without them, there’s no reward. But refrain from dumping dollars into something described as a sheer gamble.
2. Look For Founders Who Compliment You
By in large, a startup business is only as reliable of the people running the ship. Drill into the founders’ backgrounds and get a sense of the kind of people you are working with. What’s their educational background? Previous companies? What can they bring to the table as a person and a professional? At the end of the day, you need to be able to trust the people you are investing in. The road to wealth if often not forged alone and as such, a smart investor will not only look for partners who can compliment their knowledge and skill set, but also compensate for any weaknesses they may carry.
3. Join an Equity Crowdfunding Platform
If you are having a hard time finding a good investment prospect, a good fix is to join an equity crowdfunding platform. By doing this you will be able to navigate through different deals and different industries. Referring to the first point – It is important to learn about the market before making any type of investments.
4. Be Involved, Pay Attention
As an investor, you need to understand what, why, and how the startup intends to spend your money. This will give you a better sense when testing the founder’s vision. Also, review the salaries and see how much the founder intends to pay himself/herself. Understand if the money that the startup is raising would be enough to accomplish logical business checkpoints and milestones – this is a must. Furthermore, this due diligence will keep you, the investor, involved in every leg of the race. The more you pay attention, the more likely the startup grows, the faster you see returns on your investments. Yes, the capital is important, but don’t downplay the value of your action and advice.
5. Explore the Market For Acquisition Prospects
It’s impossible to see the future, but as an investor, you should do everything you can to try to do so. It’s crucially important to see what competition the startup has. As the investor, you need to know what the competitive advantage is (if any) over the marketplace. A competitive company could acquire the startup instead of mimicking their work, so investigating the hunger in the market could be beneficial. If there is competition, look at merger and acquisition history to understand what you and your money are up against. Knowing this will allow you to better plan for future funding and how you can be involved if you choose to be.
There are many early-stage growth companies sprouting from rich, plush entrepreneurial soil. But as the number of those sprouts rise, it can become harder to identify which ones will one day wear the thorns. Luckily there are many hints on the surface that can save you from getting pricked. Here are four red flags to avoid before investing in your next early-stage growth company.
1. High Burn Rates
If revenues are not steadily rising on a month-to-month basis, watch out for overhead and high expenses. Profitability always prevails as the single most important thing in business and as such, the very first dollar the company is able to generate is extremely important.
2. Lack of Support From Early Investors
If the company has already raised capital in their earliest stage, it can be very telling if the majority of investors are not reinvesting. There are many reasons for such an outcome, but you need to nail down why. Maybe the investor(s) simply ran out of capital to contribute, or maybe there’s something else. The key is to learn the reasons behind the facts.
3. Too Many Founders
Now, it’s okay if a company has more than one founder, and actually, it’s preferred by many in the investor market. It’s hard for just one founder to attract enough A+ talent to run a well-oiled machine firing on all cylinders. However, be cautious when the number of founders climb over three. With so many egos left to handle the growth and execution of the business, the growth process can actually lag and even come to a stop. The saying “too many cooks in the kitchen” has long-survived for a reason and it would be remiss to not make mention of it here.
4. No Momentum
When you take a look an investment opportunity, sift through the long-winded numbers and charts and identify what the main metric for growth is. If the metric is not growing at a decent pace (or at all) month-to-month, you can be sure that the investment will carry some risk. But that doesn’t necessarily have to be the nail in the coffin, sometimes all it takes is just a few small and inexpensive tweaks to get the ball rolling.
A business model is at the heart of any business venture. No matter how attractive an investment opportunity appears, it must have a solid way of making money to be worthy of investment – a clear and easy to follow A to Z. There are many different types of business models out there, but here are four which can offer high yield returns for venture investors.
1. Demand Orchestration
Demand orchestration will have a business acting as a third party. This business model creates a location for buyers and sellers to make transactions with each other directly — the business earns a percentage of the monetary exchanges. The most influential example of demand orchestration is eBay. eBay was able to create a platform which provides a vast number of options for buyers and sellers, and by doing this, they were able to attract a huge user-base. This user-base eventually became very attractive to first party services and products.
2. Low Prices
Offering low prices allows a business the opportunity to attract a large share of the marketplace simply because its products are a little easier on the wallet than their competitors. As the business grows, it can develop product upgrades, new ideas and even better service. The idea here is to grab substantial attention from a noisy marketplace. Once that’s been done, and the trust of the market is earned, the business might then increase its prices without losing too much from its share.
3. Reverse Auction
This business model involves buyers offering a price for a service or product. If the seller accepts then the buyer must comply to the seller’s terms and conditions. This model gives buyers a feeling like they are getting a real bargain. The sellers meanwhile can have access to a marketplace which is similar to those offered by demand orchestration, minus prices being set by producers.
A unique specialty product or service results in a limited production to high profit yield. In this model, the marketplace is dictated solely by the producer as their product or service is completely unique and in demand by (usually) a small demographic. If a larger number of people desire the same product or service, it’s likely that other companies will enter the market to compete. This business model does not necessarily need a large customer-base to turn a profit, a small number willing to pay higher prices can be extremely lucrative.