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Due Diligence For Startup Investing - Part 2

October 07, 2016

Reviewing a business is probably one of the toughest things you will have to go through in this entire process. 

While we try to provide as much data for our investors as possible, you will most likely have other questions pertaining to growth, strategy, and the overall business plan. We urge you to ask those questions in the offering section to educate yourself and other investors. With that, let us look at some of the key points you need to look at during your review.

  1. Are there customers?
    1. While not having a customer base is not a bad thing, realize that your risk just went up. As an investor, you are getting in at the beginning stages of what could be the best or worst investment in the world. You may think their product is the best thing since sliced bread, but you don’t have any growth statistics or market validation to prove your point.
  2. Money
    1. If you are looking at a brand new startup with no customer base, look at where they want to spend their money. If you feel like they are burning through money too fast or are allocating funds into the wrong departments, you may want to move on to the next opportunity.
    2. If you are investing in a startup that has a product already being sold on the market you are going to want to look at growth. Has revenue grown year over year? Are they looking to bring costs down and increase profit? Are they putting money back into this business, or using it in a way that might hurt the business?  
  3. Product
    1. This is where you take a hard look at the maturity of the technology, progress in development, and customer satisfaction. Are they evolving or stagnating?
    2. Is there a need? First, make sure that you understand the product and see a need for it. Your risk increases by investing in something you don’t understand or have a real a need for. Second, make sure consumers are asking for a change. If there isn’t a market for the product, then the business is going to have a tougher time finding success.
  4. Competition
    1. How big is the competition? - If you are looking at a startup that is trying to enter a market that has been cornered by large brands, you are going to have to understand the length of time and risk it will take for that company to make a breakthrough.
    2. Who owns the rights? - While it’s difficult to receive patents these days, if your startup does own their technology then they already have a leg up on the competition. On the other hand, if they are relying their entire business on something that can be easily replicated cheaper overseas, than you may want to rethink your inclination to invest.

 

The Market

  1. “We are targeting every person on earth”
    1. Did you know people could be allergic to water? My point is that building a product to suit every living being on this planet is nearly impossible. As an investor, you should look for startups that have identified a target market to build their initial business for, and have plans for adoption of a broader base down the road.
  2. Traction in the marketplace.
    1. Seasoned investors put their money into things they know because they can see where a business would fit in the grand scheme of things.
    2. Look into things like market barriers, price sensitivity, competition, demographics, performance within the vertical, and overall market health. If the crash in 2008 taught investors anything, it was looking at the bigger picture before deciding when and where to put their money.

 

Congratulations on making it this far. Simply educating yourself on the investment diligence processes puts you, and hopefully your bank account, a step ahead of other investors. If you haven't already, check out part 1 of our due diligence series, and be sure to subscribe in the box above or sign up for an account to get more updates on equity crowdfunding investment insights.

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More insights on due diligence in the links below: 

Surviving Through Due Diligence

Angel Capital Best Practices

Investment Fraud Prevention

Paul Graham’s Startup Mistakes

Dos and Donts of Investing in Private Companies

FlashFunders

Written by FlashFunders