Five factors to consider before investing in a start-up

— Investment tips — 3 minutes read

While at MyMicroInvest, we don't give advice on which specific start-ups to invest in, there are a few guidelines that can be taken into consideration to evaluate a company before deciding to invest in it.

There are five factors that you should focus on before making an investment:

  1. A product or service offered should be the solution to a specific problem or need the market is having. For example, when Walkman was launched, the problem people had was that they couldn't listen to music while they were going for a walk. Not only should there be a problem, but the product offered should be the best or only solution in the market for that problem. Also, you should ask yourself if the solution is viable, meaning, is it possible to create (in case it isn't built yet) with the technology available.
  2. Studying the market is the next factor. Are there enough people that will benefit from this idea? Not only that, but are these people interested in purchasing the product? Also, the target market should be clearly defined by the start-up.
  3. Third, you should check out the competition. Currently, are there any products or solutions that address this problem? In what way is the product differentiated from the others. Is the start-up going to patent or protect the product from being copied? The thing here is to see how the product the start-up will produce will be more attractive for customers than any other current or future product.
  4. Then, take a look at the management team and the entrepreneurs behind the start-up. Check out their story. What qualifications they have and what experience do they have that will back them in this enterprise.
  5. Finally, the existence of a business plan. The business plan summarizes all the aspects of the start-up in its early stages. How much money does the start-up plan to make with it. Also, what marketing strategies will they use to attract and keep customers.

On top of the factors stated above, there are a few other indicators that show how a healthy start-up looks like:

  • Having validated customers is an indicator. Many companies that are just starting up make assumptions that aren't based on facts. A company that already has customers is a company that has already proven (not only in theory but in practice) that its product sells. 
  • Another indicator is a strategic perspective. Does the start-up look like it has a long-term plan with specific goals? Planning for growth and having a 5-year plan are two factors that point out to a company having an organized and motivated mindset. 
  • Finally, communication and transparency are the two other indicators of a possibly successful start-up. An ethical team will ensure that relations will go smoothly with all stakeholders. A start-up that communicates with its shareholders (both good and bad news) in a timely manner should be considered. This is because this shows how important investors are for it.

Evaluating a start-up isn't a science. It is an art that should be practiced, and while results may not always be 100% right, it increases the chances of landing it right when it comes to investing in a start-up.

Take a look at our interesting opportunities online and test the five factors theory before investing!