Entrepreneurs these days have a rough gig when it comes to banking. Due to increased financial legislation and tighter lending regulations, traditional funding for a start up can be hard to come by. This leaves these wide-eyed dreamers and creators of tomorrow to seek out capital from family, friends and a plethora of other investors. However, because over half of new ventures fail in the first year, and over 50 percent of those who make it past year one fail by year five, it’s important to know what you are getting yourself in to before saying yes to that investment. Use these five questions as your guide.
1. Is the Start Up a Sustainable Opportunity?
Do independent research as to the feasibility of the business idea before doing anything else. Know the demographics of the market and familiarize yourself with the competition. No matter how good a start up investment opportunity might sound, remember this: people lie, numbers don’t.
2. Who Gets Stuck With the Bill?
If an entrepreneur doesn’t take the proper steps to legally structure the business (think LLC), investors can be left footing the bill in the event that the business fails. Rule number one of investing in any business is to get everything you and your entrepreneur agree to in writing, and have everything notarized or witnessed and on file with an attorney before you pen a check.
3. When Will You Get Your Money Back?
Most entrepreneurs cannot afford to pay back investors until after their venture has shown profit for at least three years, but five years is more likely. Even in the event that business is a flash-in the-pan success and turns a profit in the first year, many times entrepreneurs need those funds to continue growing the company. Naturally, you will want a repayment strategy and plan in writing before you make any type of financial contribution to the start up. This should include your repayment, plus your dividends from the profits the company accrues.
4. Can I Have an Exit Strategy?
Most investors don’t want to have a tie to a business for its entire duration, and you probably won’t either. Develop an exit strategy for yourself and your money up front to avoid hassles down the line and make this part of your investment contract with your entrepreneur.
5. Do You have a Business and Marketing Plan?
Before asking anyone to invest, an entrepreneur should have developed his or her own marketing and business plans, with solid numbers and statistics backing up their claims to fame and fortune. Once you obtain a copy, perform your own due diligence and check the statistics and numbers for yourself. Above all else, remember that you should never invest money in any start up opportunity using more cash than what you are prepared to lose, because no matter how good it sounds, all start ups are a gamble.
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