Business startups that are growing fast often need capital to fund inventory and purchase orders and to build vital infrastructure. Bootstrapping entrepreneurs have put in a lot of sweat equity to build the business to the point where it’s ready for an investment. As an angel investor, you can acquire a percentage of the business without doing any of the physical work. The business owner gets capital to grow the business, and you participate in the profits when and if the business succeeds, based on your percentage of ownership. If you pick the right business and hit a home run, the investment could yield five times to 100 times your initial investment.
As with any investment, performing proper due diligence to mitigate risk is crucial, including the following:
Invest in What You Know
If you’re not passionate about food and know nothing about running a restaurant, that’s probably not the best investment for you. By sticking with what you know you have a much better under- standing of the potential pitfalls the business may face, and the blind spots the owner(s) may not be aware of. Furthermore, this gives you more control as an investor because you can add value to the process.
Invest in People
The people behind the company are far more important than any other factor, including the business model and market potential. Know whom you’re investing in. Study their experience and track records. Understand what value they bring to the table.
Understand the Financials
How does the business make money? Is it profitable? If not, is there a clear path to profitability? Are the projections realistic? Does the pricing make sense? Is it in line with market demand? If it is a listed company, what is the return on equity?
Don’t just focus on the earnings per share. A deeper understanding of the operating business allows for a viable forecast of future business expectations. Are the profit margins significantly high? What is the real value of the stock? If the company stock is trading less than its intrinsic value, the market may be indicating that the stock is undervalued, representing a buying opportunity.
Study the Market
Is the market big enough for the company to grow big? Is the business truly solving a problem in the marketplace? Analyze the competition. Does the business have a competitive advantage? Is the company in tune with customer needs and is it adapting to the market and fine-tuning its offers quickly? Follow this simple 5-step formula:
- Define a large demographic with a real problem that you can solve.
- Ask if they would pay to have their problem solved.
- Ask them to pay you to solve their problem.
- Figure out the process in solving their problem.
- Develop a scalable model for solving the problem.
Scalability
Is the business scalable? How can it grow large enough and quickly enough to pay back your investment with a return?
Research the Use of Funds
How does the company plan on using your investment? Is it really what they need to grow to the next level? Does the founder’s vision align with yours? How much does the owner intend on paying him or herself? Is it a reasonable salary for a start-up, or is he or she being prematurely greedy?
Review the Legal Documents
Look at the articles of incorporation, by-laws, and any other relevant documents to understand how the company is structured and who is involved.
I’ll continue to offer my thoughts on some interesting and potential lucrative Momentum investments in my next post.
In the meantime, what has been your experience with such investments, if any? Have these paid off for you, or are they new to you? Thank you for sharing.
Secure your copy of the “5 Day Weekend” book. 5 Day Weekend: Freedom to Make Your Life and Work Rich with Purpose [Nik Halik & Garrett Gunderson]
Leave a Comment