Finance

Risk Assessment: What to Look For in a Startup

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According to some studies, 20% of small businesses fail within the first year of starting.

If you’re an investor and want to make sure you don’t accidentally lose all of your money on a bad startup, you should know what to look for in a risk assessment.

Thankfully, we’re here to help you invest your money in the right places, so keep reading to find out what you should look for to get a solid ROI.

Good Business Plan

Investors should look for a solid business plan that will help guide the company when things get messy. This will also show that the CEO isn’t just making it up as they go and hoping for the best.

A business plan will show that they have a vision and are being realistic on the goals to achieve to get there. 

In a business plan, you should look for things like marketing strategies, specifics about the market, and any financial projections. 

Size of the Market

Investors should be looking for companies that have the right market to grow in. Even though they’re a small business now, with the right market conditions, they could grow into a large company and have a good return on investment. 

However, sometimes the market isn’t great for helping those businesses succeed. For example, Uber and Airbnb were never expected to monopolize the industry, but now they’ve become competitors at the top because of perfect market conditions that allowed them to grow. 

Something to Stand Out

With a lot of people having great ideas, you need to invest in places that have a product or service that is going to set them apart from the rest of the businesses. 

While it doesn’t have to be the next big thing like Amazon, you do want something that makes the business unique. Also, keep an eye out for how they address their competitors. Are their competitors doing better than they are?

Traction

If a new company is saying that they have a marketable business plan, then they may have the numbers to prove it. They may have already been selling to customers for a while and can prove that their concept is something consumers want. 

You should see if there is traction for this company; are people excited? You can ask the company if they have held any surveys or polls to gather interest in their company. If they have, you should ask for the results and review them carefully.

Are people confused about the company? Are they unsure what they’re really selling? These could all be red flags when it comes to making a risky investment. 

Valuation

When you’re looking for investment opportunities, make sure that you do a valuation as well. You should find a company that has a low valuation rate. 

For example, if a startup is deemed risky, you’ll probably want to earn as much of that as possible, which will push down the valuation. Many entrepreneurs know this and will try to raise their valuation higher in order to get their money. 

Financial Reports

As an investor, you need to ask yourself how much do you want to invest in a company and when should you invest it? Will you be able to get enough back, and when will you get that return? 

You can run a financial projection that will tell you what assumptions are behind the business, their cash sources and how they use it, a return on investment analysis, a sensitivity analysis, their balance sheet, statement of cash flow, and their income statements. 

You should look at these reports monthly so that you can see if the company is having any shortfalls with cash. 

Leadership

You shouldn’t invest in a company that doesn’t have a strong leader in place. You may not need to know everything about the technical portion of the company, but the leader should be someone who is passionate and knowledgeable about their business. 

If you have a good leader in place, you can rest assured that they will do everything to help that business succeed, including hiring a good team of employees who are also willing to make that dream come true. 

Product

It can be hard to judge a product or service in the early prototype stages, but sometimes that’s all you’ll have to work with. 

You should also for quantifiable metrics on the product if they have them available. If they don’t, you may just have to rely on your previous market experience or knowledge. Some investors even just rely on their gut feeling. 

You should also ask if there is a market need or want for that product. Are people actually going to be interested in it? Are there other products like it on the market that are significantly better?

It can be hard to judge whether or not a company is really a good investment choice, but people like Elizabeth Edwards are here to help you make those decisions!

Learn More About Risk Assessment for a Startup

These are only a few things to look for in a risk assessment of a startup, but there are many more things to consider.

We know that investing in any business can be risky, but you don’t have to do it on your own. We’re here to help you out!

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