Investing in a new company can yield significant returns. However, this is an enterprise that requires risk assessment. Every investor wants to put money into a new company with significant chances of taking off. It’s essential that you award enough time to background research before agreeing to invest in a new company.
Even before outsourcing financial managers to do some background research on new companies, every investor should clarify some personal matters. You want to understand who and what you are investing in, define your values, and ensure the final decision is your personal choice.
Humankind can easily get lured into investment. To avoid getting pressured into an investment opportunity, here are five crucial questions to ask yourself before you choose to invest in a new company.
1. Do They Have An Active Corporate Social Responsibility Structure?
As a socially progressive investor, it is necessary to conduct due diligence when considering a business to invest in. Ask yourself whether the business’ moral, social, and ethical standing is one that you would want in your portfolio. Properly vet the business as a socially responsible investor.
Also, ask yourself whether the company is greenwashing. Corporate social responsibility has become a norm. Companies are getting more and more familiar with not only how they should report but also what not to show. Only publishing the information that paints the company in the best light while neglecting essential information is greenwashing.
Companies are no longer only judged by their shareholder return and profits. Today, they are held to account for their integrity and positive impacts on the environment and humankind. Check that the new company has not withheld some issues that would be more material to its operation’s effect on society in general.
2. How Involved Do You Want To Be In The Company’s Daily Activities?
Your level of involvement will directly influence the type of investment you should make. If, for instance, you wish to have limited interaction with the team, then you can do so through a venture capital firm. If you want some level of involvement, consider going in as an angel investor.
An angel investor, also known as a seed or private investor, is granted a stake in the new company. Private investors get the opportunity to participate in the decision-making alongside the company’s leadership. Asking yourself the question of involvement should guide your decision on whether and how to invest in this new company.
3. How Long Are You Willing To Wait For A Return On Investment?
While there are several overnight success stories, many new companies take years to realize significant profits. Investing has always been a long-term game. It is, however, still crucial to have an idea of the timeframe you are willing to wait.
While some investors are okay with waiting up to ten years to realize their returns, others desire to have their money back in five years. Therefore, you should consider if the new company meets your expectation on the return on investments.
Evaluating the startup’s track record should help you approximate how long it will take. One way to judge the company’s potential is through the burn rate. The burn rate is the amount of money spent monthly. When a new company has an exceptionally high burn rate at the early stages, this may indicate a longer investment horizon.
4. Are You On An Entrepreneurial Venture Or Investing In Humankind?
While it may sound obvious, knowing exactly why you want to invest in a new company ensures you reap the most out of it. What you want could be the returns, impact or both. You could be doing so in philanthropy, looking to a better life for humankind by recycling capital. In that case, you should be more open to putting in a first-loss capital that will catalyze later investment.
You may be interested as a seasoned entrepreneur who knows that direct investment suits you. Such would be great when you also like to advise and fund growing businesses. You may also want to use impact investing in engaging your children with wealth in a way that teaches them social values and investment. Articulating your motivation for investing in a new company will ensure that you only invest in a company that can meet this expectation.
5. What Value Will You Offer The New Company?
Most new companies seek angel capital due to the value they bring on board. This question is most important if you consider yourself a social entrepreneur, so take time to reflect on it. Beyond asking how the new company will benefit you, ask yourself what business acumen and expertise you bring in as an investor.
Humankind is prone to only seeking what benefits them. True social entrepreneurs will ask themselves if they are the right fit for the new company. If you have multiple networks in a given industry, choose a new company that would benefit from them.
If you are in a position to offer a company your valued time as their board member or introduce them to like-minded investors, you will be more valuable to them. If you have experience in impact measurement, consider helping them come up with more valuable and efficient ways to measure and report their outcomes.
While you may not always end up investing, you could still choose to help the company with your expertise anyway if you believe in its mission. Your value does not depreciate when you help a company whose growth you won’t invest in.
Conduct Your Due Diligence
Investing in new companies is an excellent avenue for investors to grow their portfolios while contributing to an entrepreneur’s success. However, this is no foolproof investment. While new companies may have lucrative cash flow projections, what seems good on paper may not always translate in the real world.
Taking time to execute due diligence as you research the new company is something an investor cannot afford to skip. Once you land on a company, ask yourself those five questions before taking the next step.