What You Should Be Asking When Assessing An Investment

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By Linda Doell

When examining a startup investment opportunity, there are some things that need to be assessed before agreeing to sign over money.

Investing in a startup is a risky enough business -- most startups fail in the first five years -- without first taking some precautions and applying some scrutiny to ensure the best possible investment.

Business Plan

Does the startup in question even have a business plan? Sometimes startup companies seeking funding are nothing more than a good idea and that should give an investor pause.

A sound business plan is one of the cornerstones the company will be built upon and investors need to review the sustainability of the startup's business plan.

"Does the firm have a sustainable competitive advantage?" asks Tein-Chin Camille Lin on Globalvations.com. "This competitive advantage may consist of the use of emerging new technologies, creation of a new product or an improved version of an old product. A startup company with high potential always has a clear market picture with a market penetration plan."

Management Team

It's difficult to assess a business when chances are the startup hasn't even gotten its product to market yet. That's when investors need to focus more on the team than the business model.

Is the team motivated and competent? Do the backgrounds and skill sets of the management team members complement each other and are there any experience holes or missing competencies that should be filled? Do management team members have the flexibility to change and adapt to market conditions and changes to the business? A red warning flag should pop up in the minds of investors if the team isn't flexible to change.

"To be on the safe side of any business or investment opportunity, you must think and analyze the business investment like a Venture Capitalist," wrote Ajaer Tony Martins, an entrepreneur and investor, on StrategicBusinessTeam.com. "... VCs prefer a strong team and an average product to a weak team and an excellent product. This is the major reason why most brillian busniess ideas don't get funded."

Know The Way Out

It may seem odd to be looking for a way out of the investment before even making the investment, but the startup should have a clear idea of an exit strategy and how they will pay their investors.

If the startup is in its earliest stages, investors should be prepared to hang in with the investment for several years. However a startup should also be able to give investors a list of competitors who could acquire the company. Mashable's Bill Clark recommended thinking twice about investing in a company that can't tell investors what its potential exit would be.

Knowing that investing in startups is a gamble to begin with, taking a critical look at a startup and knowing how to get out of the investment once invested could boost the odds in an investor's favor.