BLOG: What to remember when investing in growing businesses
Over recent years I have spent a significant amount of time looking at startup and growth investment opportunities as a way to broaden my investment portfolio with the aim of generating stronger returns. In that time, I have met countless companies and entrepreneurs with ideas and businesses, some great, some questionable, but all with one thing in common: An extraordinary sense of enthusiasm about what they are doing and a strong belief that their business has the ability to either disrupt an existing marketplace or carve a new niche.
So when presented with a constant stream of investment opportunities, how do you chose where to invest? If you invest in the right companies that go on to being very successful, as an early-stage investor the potential gains are significant. Choose to invest in one that is the next Google or Facebook and you’re clearly going to do very well, but that is not going to be the common experience. Some businesses will perform better than expected, some worse. Getting over-excited about one particular opportunity and putting all your eggs into one basket might either result in a significant ‘win’ or be an extremely risky approach that may lead to a significant loss.
Unfortunately, you can never have a guarantee about the future success of a company but there are a number of sensible steps I take to get the best shot of getting returns on investing in scalable businesses.
Here are the five top rules I stick to when looking to invest in growing businesses:
Invest in people
The management of any enterprise is key. Do some digging into the management team behind the company and ask yourself, is it driven? Does the team seem smart enough for the challenges that may come along? I have seen many great businesses where the underlying thesis makes compelling reading, but I could not get myself convinced that the management team is the right people to take it forward. Familiarising yourself with the track record of those steering a company and understanding the success of their past endeavours can give you peace of mind as an investor in their next venture.
It’s not a radical new thought to suggest diversification, but it is one that can easily be forgotten. You can read about the next new social media App that is going to make you millions, and it can be all too easy to convince yourself to put all your investible money in that one opportunity. While it could reap rewards if it all works out, you could be left with empty pockets if it doesn’t. Given that the path to success is never a straight and unwavering line, investing across a broad range of industries, SMEs and startups that are different stages of their evolution, and with difference risk/reward parameters is a smart approach.
Do your own due diligence
When I started investing in growth businesses, I received all kinds of presentations and brochures filled with compelling stats, great quotes and forecast financials that painted a very rosy picture. No matter how justified, I never rely purely on information that has been provided to me – as an investor, it is vital to do you own due diligence on a company no matter how big or small.
In the tech-driven world, it is easier than ever to search for information on markets, competitors, the management team and other useful background to give you a more holistic view so you know what you are getting into. At the end of the day, if you do not feel confident or comfortable, don’t invest.
Understand the risks
Investing in small but potentially fast growing and scalable businesses is not for everyone and there can be significant risks to accept from the get-go. Investors should always think about whether they know their rights, regardless of whether their investment is small or large in the context of an overall fundraising. Check if you are a true minnow, or part of a wider pool of investors with combined rights? Check if you get to vote in key matters and what terms you are agreeing to in receiving ongoing information to understand how your investment is developing.
Understand what the business actually does & the market opportunity
This is such as simple and obvious premise but one that is often ignored. It is easy to get sucked in by seemingly knowledgeable friends’ recommendations or hype from media headlines and sink your hard earned money into a company you do not fully understand. Many people I have spoken to have invested in companies, ranging from large corporates quoted on a stock exchange to a startup, without really knowing what they do. Investors will do well to heed Warren Buffet’s advice: “never invest in a business you cannot understand” even if they may not be able to match his level of success!
If investors use these tips as a starting point, they will be better off than most when looking to offer finance to growing businesses.
Paul Moravek is co-founder of VentureFounders.
VentureFounders Limited is authorised and regulated by the Financial Conduct Authority (FRN: 613003)
Investing in startups and early stage businesses involves risks, including illiquidity, lack of dividends, loss of your investment and dilution and it should be done only as part of a diversified portfolio. VentureFounders is targeted exclusively at investors who are sufficiently sophisticated to understand these risks and make their own investment decisions. Investment opportunities are not offers to the public and you will only be able to invest with VentureFounders once you have made the appropriate declarations and been accepted as a VentureFounders member.