Investing in a start-up can be a risky move. Before you invest any amount of money in a company, you will want to feel confident that it has the potential to pay off. Start-ups that are looking for an investment opportunity will do their best to sell their idea, so taking a step back, looking at the bigger picture and keeping some important factors in mind will help you to know if investing is a good idea. If you’re not sure where to start, here’s some advice on what to look for when deciding whether or not to invest in a start-up.

Compare The Start-up to Their Competition

Measure the originality of the start-up’s idea against others. Are other businesses taking a traditional approach to a product or service, while the start-up is putting forward a more innovative, fresh idea? If that’s the case, consider the likelihood of customers preferring the new idea over the traditional ones. If an idea has the potential to make a service or product more accessible, affordable or beneficial to a customer, it could revolutionise the industry that the start-up is breaking into.

Check Out Their Financial Statements

If you can, read the start-up’s financial statements. You will want to look at how the start-up is managing their cash through operations, such as sales and accounts, investing, including buying and selling assets, and financing, such as selling stock and paying debts. From there, you will want to determine if the company has an overall negative or positive net cash flow.

Generally, if a company has a negative net cash flow, meaning that they spend more money than they are making, they will need to earn more money or raise more funding to survive. While, of course, a positive cash flow is a great sign that a start-up may be successful, consider where they have invested some of their money. If a company has made investments by purchasing stock within another company, it could show a negative cash flow but not have a negative impact on the company’s net cash position in the longer term.

While looking at a start-up’s financial statements, you should also calculate their net worth. A company’s net worth shows how much money they would have if they decided to close the business now. To work out a start-up’s net worth, add up the total amount of their current and long-term liabilities, and subtract the amount from the total of their current long term assets.

Consider Their Plans for the Future

A start-up should have a long-term plan to grow and expand. As part of long-term growth, a company should have some ideas about how they can adapt to any changes that may be prompted by external factors, such a change in their customers’ behaviour or preferences and other innovations within their industry. A company that has the drive to adapt and continue to develop overtime is safer to invest in than a business with low adaptability.

Interested in Creating a Start-up Yourself? Contact Think10

If you’re an entrepreneur, Think10 is passionate about forward-thinking ideas and supporting all stages of start-up growth. Get in touch with us today to discuss how we can help you.

Chris Cutout

Chris Dixon

Fund manager

cd@think10capital.com

Chris Dixon is a Think10 Capital’s Digital Fund Manager with specific responsibilities of managing digital funds and driving strategic growth. Dixon brings his experiences in capital and investment management through prior involvement in private equity and institutional investment in the United States. Over the past decade Dixon has lived and worked in Melbourne, Australia where he now resides.