I have been approached by friends and family with various proposals from start-ups/ new ventures seeking equity investment in their company. Usually, they want my opinion on whether or not it is a good venture and whether they should invest. The first thing to establish is that the product/service/ business offering is viable and marketable and that it is attractive to other investors. My answer is always the same – speak with an investment banker; and if you are unable to then here are 5 things to look out for before making that decision
1. Legal structure
The truth is that no matter how good the business opportunity is or the product on offer, if the structure isn’t fool proof then I wouldn’t touch it. By legal structure I mean incorporation as well as an active/experienced and credible board. The board is separate from the executives as they are there to oversee and direct the affairs of the executives. This is important because an effective Board portrays integrity and availability of balanced objective advice which helps in mitigating risk. So please ask the executives of the company you want to invest in whether they have a board set up and the pedigree/expertise of the board.
2. The people/Management Team
Have you seen situations where beautiful businesses fail? 9 out of 10 start-up companies fail. Integrity of the floaters/executives is too important. To put it simply, you would be putting your money in with people and you want to be sure that they have the skills necessary to run the business as well as integrity. Too many times, I have seen situations where the floaters of the business have expertise and determination and “seeming” integrity but once the company starts to make money, they start playing pranks and the investor is usually at the shortest end of the stick.
3. Risk vs Reward
Now this part is personal in that you have to ask yourself whether the risk you would be taking by investing in the company is commensurate with the reward to stand to get. For example, if I have 1m to invest and there’s a 30% risk of default by the company but a 70% chance of profitability versus a 10% risk of default in another venture but only a 30% upside, I would need to determine which one gives me more peace of mind. This would depend largely on your risk appetite.
4. Consider a professional
I would rather pay some money to have a professional look into the opportunity if it interests me that much than make a mistake that would be costly. Investment bankers are equipped with the skills necessary to evaluate companies. They carry out due diligence to help with issues such as valuations (to ensure you’re not paying more than you should for the investment) etc. a financial consultant is also a good professional to speak with to ensure that the opportunity is right for you.
5. Is the investment right for you?
What is your investment objective? Is this the best use for your money? For example, would it make better sense to put the money in another venture or pay off existing debt? Equity investments are pretty long term, you must ensure that the investment ties in with your personal finance as it might be difficult to get out of an equity investment especially in private companies. A wealth plan is a valuable tool to answering these questions and setting your goals.
Still need CLARITY? We at Adashe Consulting Limited, financial consulting firm that focuses on bridging the knowledge gap between you and your money ensuring that you are making the best decisions for you at every point in time, can help you. Schedule call with us today.
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