Small business is the backbone of the U.S. economy, they create the majority of all new jobs in America. Most of us got our first job in a small business. Unfortunately, the highest rate of business failure occurs in startups and early-stage companies.
The underfunded entrepreneur has become a cliché, they’re always, looking for money. This provides many excellent opportunities to those with money to lend and a cast iron constitution. Who wouldn’t like to get in on the ground floor of a computer company growing out of a garage or a social media platform starting in a dorm room? Of course, these unicorns are generally a once in a lifetime opportunity but they’re not the only opportunity.
Startups and very early-stage companies are at the far end of the risk/reward scale. Most are also at the point where just a little seed capital could make all the difference in the world. Maybe even the difference between another dismal statistic and the king of Wall Street.
If you think you’re ready to go out on that limb, and you meet the criteria, money and guts, here are seven things to consider before signing the check.
- You’re investing in people. At this point there’s little, if any, track record and forget about liquidating assets as a means of recovering your investment, there aren’t any.
- Do the founders have any experience in the business’s core product or service? Past performance, for the most part, is not a good predictor of future success but you have to base this leap of faith on something.
- Is the founder relentlessly passionate about the business and 100% committed to its success?
- How have they gotten this far? Where did the funding come from that enabled the business to survive and grow to this point? Have the founders pitched their friends and family? If they’re not confident enough to bet the mortgage or offer the opportunity to their inner circle, do you really want to risk your money?
- Is this business creating real solutions to real, recognizable problems?
- Is there a documented need for the investment? Will your money be well spent?
- Is the growth path capable of providing you with a return?
Finally, don’t shy away from investing in startups or early-stage ventures just do it wisely and when all else is said and done, trust gut feeling and act on them. Most importantly, plan for and anticipate losing your entire investment.