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Five ways to avoid failing when investing in Start-ups

To be fair, there is always a high degree of risk involved with investing in any start-up. You cannot eliminate these risks, but you can minimise them and mitigate their potential impact. It is therefore very important to appreciate common mistakes that could very well cause an investor to lose a great deal of money within a relatively short period of time. Highlighting these pitfalls is the first step towards lessening the chances that they will occur in the future.

1. Failing to Understand the Industry in Question

This is arguably the most common and avoidable mistake. Some investors can get caught up in the hype of a new product or service without appreciating the industry as a whole. This can lead to errors in judgement and poor decisions. Understanding the larger industry is the first step towards predicting whether or not a novel product or service will have a noticeable impact.

2. Not Examining the Third-Party Team

Many experts point out that a start-up company is defined more by its team than the services that may be offered. Some investors fail to appreciate this crucial point. Of what good is the crew on board a sailing vessel if they have little knowledge of the ocean? In the same respect, it is crucial to examine team dynamics to make certain that they have what it takes to push an idea through until fruition.

3. Ignoring Past History

Past performance can often be a viable indicator of future success. Some investors do not spend the time to look into the history of the founders. For example, have they been associated with other failed projects or have they walked out on a specific idea before its completion? There are many would-be entrepreneurs who fall into this dubious category. Such track records may be indicative of a risky venture.

4. Glossing Over Finances

Even the best ideas in the world need to embrace a well-rehearsed monetisation strategy if they expect to enjoy success. Some novice investors assume that this concept has already been addressed. On the contrary, many start-ups fail to secure financing due to the lack of a viable plan from the very beginning. This point should not be taken lightly. How does the firm expect to raise capital and what is their projected completion date? How many investors are currently on board and how close are they to achieving their stated goal? If any of these areas are hazy, it may be best to walk away or to wait until further funding is secured.

5. Not Giving the Competition Enough Credit

Most industries are extremely competitive in this day and age. This signifies that start-ups will face a significant amount of resistance during their early stages. How stiff is this competition and what is the size of their overall market share? Always remember that a start-up is akin to a small fish in a very big (and frequently unforgiving) pond. It is also vital to examine the competition to determine whether the new company is embracing an approach that will provide them with a USP or a niche market. Without this determination, an investor is literally entering into an agreement, blind.

These are five common errors which could thwart an otherwise sound investment plan. Each should be used in conjunction with the others as opposed to being taken as a stand-alone suggestion. Recognising these situations well in advance will help to minimise the chances of making a poor judgement call.

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This was posted in Bdaily's Members' News section by Shadow Foundr .