Both newcomers to the investment game and experienced investors understand there is no perfect alchemy to choosing the perfect startup or business. Whether you are assessing startups or more established companies, the promise of success cannot be determined by any single factor. How then, to establish the next big profit opportunity? With vying companies pitching their prospectuses with enthusiasm and a wealth of online financial advisors, for both novice and experienced investors, this is a tricky task. However, the below traits, while not conclusive, may be helpful for uncovering the next big thing.
First and foremost – look at the market need of the industry in which the company operates, and determine whether the business or service will resolve a problem without a current solution. The importance of establishing market need for startups was reviewed by CB Insights and KPMG, who researched over 100 startups’ reasons for failure. The prevailing reason, responsible for 42% of the companies’ failure, was a lack of market need.
This striking statistic suggests that independent research is necessary into the industry – look at their competitors, stories of failure from within the industry, assess independent surveys and studies. The marketing materials of the company will doubtless paint their place in the market positively, but to invest with confidence demands objective, neutral insights into where the company stands.
Next, look at the strategy the company looks to pursue – which is comprised of its ownership, its management, and its exit plan. Any company that fails to fully educate prospective investors on these structural components does not have a sound strategy. Though it may seem overly ambitious, it’s not inappropriate to ask about the exit strategy, the company’s plans/timetable/pathway towards this.
Likewise, if you’re a hands-on investor, then feel free to request more information about the makeup, background and experience of the team. Startups are the sum of their teams’ talents – they demand both a strong vision and capable employees. Similarly, researching the ownership structure is well within your purview, as it’s important to understand there is no controversy over ownership, whether copyright or otherwise, and to make sure there are no threats to a stable investment.
Lastly, understand the risks that are inherent when looking to invest in this particular type of company and industry. Traditionally speaking, there are several ‘buckets’ of risk that impinge on the success of startups.
Firstly, the ‘company’ bucket, demanding investors look at the risks tied to the company’s founders and expertise. Next, assess the industry’s risk – consider whether their service is sustainable in the long term? Within tech startups especially, there can be insurmountable barriers when it comes to both regulation and technological advancements. Then, look to the financial risks – the timing of the company’s raise, what their likely valuation will be, and whether, in the long-term, IPO is possible or even likely. Evidently, it would require a fortune teller to predict the state of the industry in the five to seven years by which your investment will be liquid, but by following the above steps you at least shore yourself up against some of the risk.
The above criteria are but a few available to help determine profit opportunities. Market need, strategy and risk are valuable considerations when discussing the company’s structure and the nature of the individuals attached to it. Informed investors are the most successful ones, so be sure to seek independent financial advice, and make sure to revise all prospectuses provided to you with heavy scrutiny.
SIgn up to our newsletter to receive weekly news about unlisted investments.