Many startup companies have Spartan conditions until profit goals are reached.
Investing in new companies that are in the early stages of growth and expansion is very challenging. The vast majority of new companies fail within the first five years. Most burn through initial cash investments and require followup funding, as well as management help. However, for the few investments that do pay off, there are sometimes colossal profits. A good rule of thumb is that one out of every 100 investments succeed; therefore, filtering out good companies from bad is key to succeeding.
Instructions
1. Determine if the new company has an effective chief executive. A startup will fail without an effective leader. Leaders come in all shapes and styles, but the common trait is effectiveness. To invest in a company that will grow, the leader must have a strong track record of achievements. This can include failures as well as success, because a startup requires someone who is willing to take risks.
2. Conduct business model analysis to vet the potential success of an investment. Even the best management staff in the world cannot make a bad business model work long term. A business model should generate healthy profit margins and growth potential, and set up some barriers to entry for some potential investors. The business plan should be easily understood but difficult to imitate. The company should not rely on one or two big customers for the majority of sales. Finally, the company should occupy a niche where the value of goods or services delivered is perceived by customers to be above the cost.
3. Set objectives for sales, business growth and profitability to ensure that emotion does not trump investing logic. Make as dispassionate a decision as possible, while taking into account the business's circumstances and environment. These objectives, or milestones, should be challenging but not impossible to achieve in a given time period and clear from the beginning to both the investor and management team.
4. Have working capital to invest in a startup. Working capital is the cash needed to pay for basics like rent, utilities, salaries and communication. In addition, working capital pays for materials needed to produce products for sale. Companies often do not fail because of poor sales, but because cash from sales does not come in fast enough to pay off debts.
5. Plan an exit strategy to cash in on a growth company, if necessary. Maybe the exit plan is to have another investor purchase the company. Or the startup could go public and the investor could cash out by selling shares. Liquidity matters because if shares cannot be sold, then profits cannot be realized.
Tags: business model, company should
