It can be extremely tempting to invest in a high-potential company and support its development from the very beginning. There are many lucrative startups in every industry that are bringing innovative products and services onto the market, and jumping onboard such a project at the right time can yield numerous benefits.
But as with all investments that can produce significant rewards, the risks are just as high. Investing in a startup can be very tricky, given that many emerging companies don’t even make it past the one-year mark. The majority of those who are lucky enough to survive the challenges that arise in their early years remain at a break-even point, which doesn’t exactly make them good investing material.
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There’s only a very small proportion of startups worth investing in, so if you’re looking to bypass the risk of losing your funds and ensure your investment pays off, you have to learn how to spot the winners. Instead of getting carried away by the hype or relying on intuition, you should focus your attention on examining some key factors that can help you determine each startup’s investing potential.
Past Performance
It’s often said that past performance is the best predictor of future success, and that definitely holds true in the business world. The way a company has evolved over time can give you an idea of how things may progress in the future. Obviously, startups won’t have decades of activity under their belt that you can analyse, but they still have a history behind them, as short as it may be, and that’s where you should start your investigations.
Looking at how the company has behaved since its inception can help you identify signs of strength and reliability, or on the contrary, weakness and inconsistency. Startups with a steady and event-free evolution, even if their growth was slow, are the most promising ones. If you can’t find data about the startup’s past, you might want to look elsewhere for your next investment opportunity.
The Numbers
Numbers don’t lie. Sometimes they support the information that the startup has shared with you and back up the founder’s claims; other times, they tell a completely different story. A company’s representatives can put together great presentations and have you think they’re on the brink of success, but you also have to look at the hard data and see if it matches what you’ve been told. Any discrepancies should be regarded as red flags.
Check out the startup’s annual financial statement, how much they’ve lost or earned, how they’ve handled their finances and so on. You can take your investigations further and look into how many employees have filed compensation claims for injuries at work, the turnover rate, or the feedback that the company has received from their customers on their sites or social networks. All this data can help you gain a better understanding of the company you’re assessing.
Compensation claims for injuries at work can help victims of accidents get paid for the emotional and physical pain they experience as well as any medical expenses related to their injuries. Compensation claims also represent a sensitive area for both owners and investors with the rise of financial litigation. In recent years, this has become a new and lucrative form of alternative investing that allows investors to make money through the court system. Businesses have to take caution as their competitors can take advantage of this opportunity to finance claims against them.
Between 2019 and 2020, the litigation finance sector grew from 41 dedicated fund managers to roughly 46 by the end of the following year. While these firms are comparatively small, assets under management (AUM) topped $11.3 billion at the end of 2020, a figure that grew compared to a year before.
For institutional investors, litigation finance investing promises better return on their initial capital investment. On average, the median annualised return for resolved investments – after fees and expenses – is 52%. In comparison with the S&P 500 which had an annualised return of 8.7% since January 2014.
More so, experts suggest that investors are more prone to lean towards litigation finance investing when equity markets start to trend downward. While there is the possibility of re-evaluation of uncorrelated assets, litigation financing typically allows investors more freedom and flexibility.
While investment is not without high risk, which in this case delivers exceptionally high rewards, investors should keep their portfolio commitment to no more than 10%. Although a smaller percentage compared to other forms of portfolio allocation, minimising investment could also be favorable in high-profile lawsuits or cases that could play in favor of the plaintiff, not necessarily the backer.
The Team Behind The Project
A startup is only as strong as the team that’s running it. There are many aspiring entrepreneurs out there with great ideas, but only a handful of them have the necessary knowledge and skills to turn their vision into a reality and set up a profitable business.
That’s why you need to get up close and personal with the people running the show and figure out if they are skilled enough to get the business off the ground, if they’re still in the early stages, or make it thrive even in unfavourable conditions if they’ve been on the market for a while. Apart from meeting with the founders and discussing the various aspects related to their startup, you should also run a background check on team members in management positions and look at their track record.
The Values And Ideas They Promote
When you assess a startup for investment purposes, you have to look beyond what they do and understand how they do it. In other words, it’s necessary to dive a little deeper and get to know the culture of the company you’re evaluating.
The best way to do that is by analysing the leaders’ qualities. Leaders are the ones that set the tone and determine the direction of their company. The values and principles that the leader establishes and upholds are the pillars on which the startup’s culture is being built. So, you have to identify these values and beliefs and see how they translate into action. Are the team members passionate about what they do? Is there a sense of cooperation and openness in the company? These are the kind of questions that you should find answers to.
Market Characteristics
Companies operate within specific niches and industries, and the characteristics of these environments have a big say in their success. For example, a startup that launches in an oversaturated market has lower chances of standing out from the competition and turning into a full-fledged company than one that finds a niche with fewer players. It’s not impossible for such a business to thrive, but it’s definitely going to be a very bumpy ride.
You need to consider the industry or niche, analyse the supply and demand for the products/services that the startup brings to the market, and also check out the competition. Only then can you make an accurate assessment of how likely it is for the startup to succeed.
In-Person Visits
Everything may look great on paper, but things may look a bit different in reality. Spreadsheets can be faked, reports can be altered, and public information can be misleading. If you want to understand what you’re dealing with, you have to meet with the startup’s founders face to face and go for an on-site visit. It’s a lot easier to grasp a company’s potential when you see with your own eyes how they handle their operations and go about their daily activities.
All these aspects can help you figure out if the startups you’re considering would be a good addition to your investment portfolio.
