With super low interest rates and uncertainty in the share and property markets, investor activity in the start-up space has been red hot. Start-ups and early stage private businesses are obtaining some eye-watering and unsubstantiated valuations.
It goes without saying, picking a winner in the start-up space is notoriously difficult. Even the best Venture Capital firms expect only 1 or 2 strong performers out of an entire fund’s portfolio. So, what do you need to be looking out for when making an investment in a start-up or privately held company?
When faced with imperfect or incomplete information, you really need to cut through the noise and remember a few basic lessons when it comes to investing. Here are some of our key learnings from our journey so far:
- Does the business solve a problem? Invest in a company that solves a real problem and that people will buy from or already do buy from.
- Invest in people. The start-up journey is so fluid – expect strategies and business models to change. Are the founders capable of rolling with the punches and executing in a fast paced and dynamic world?
- Make sure the founders have skin in the game. It can’t just be sweat equity – it must also be cold, hard cash. It’s key to share in the upside and downside together.
- Do your research. If possible, get to know the people and the business. Take a short-term advisory role before plunging in with both feet.
- Who’s doing what? Don’t invest based on the calibre of the other investors. Invest in the people who drive the performance and who run the company.
- Pay for proper, qualified advice. That means tax, legal, accounting, everything. And this goes without saying, but make sure you have a Shareholders Agreement drawn up and signed!
- How big is the opportunity? Assess the size of the opportunity you’re looking at; realistically, how big could the potential market be?
- Don’t be dumb money. If you’ve got skills to contribute, don’t be a silent investor. Invest in a company where your advice and support are valued.
- Focus, Focus, FOCUS. Ensure the founders live and breathe the company’s success – too many side projects equals a distracted entrepreneur.
- Don’t be overconfident as an investor. Understand what you don’t know and recognise your ignorance. There are always things we overlook.