The success of few start-up like Uber Taxi, Airbnb, lyft, sidecar and Facebook have made Small Business investment option a good choice.
There are reasons to doubt the survival of some start-up even after reaching the late stage(started getting customers). However, before investing, there are indices that should be considered.
In 2011, solar powered battery start-up Solyndra filed for bankruptcy after spending over $1b in venture capital funding.
Many small businesses or start-up takes years to break-even. The dotcom bubble of 1999 and 2000 is also an eye opener.
During the dotcom failure, many promising start-up like pets.com and webvan failed completely while others that almost failed later recovered and became market leaders. Amazon whose stock went from $107 to $7 bounced back a decade later to $500.
Here are 5 factors to consider before investing or funding any small business or start-up:
The uniqueness of the idea
Every new idea needs to be tested even if there is high probability of success. A unique business idea is one of the ways to Identify a small business that is worth funding.
Every new idea needs to be tested even if there is high probability of success. A unique business idea is one of the ways to Identify a small business that is worth funding.
It can either be a new idea or an improvement to an existing idea. Before bankrolling any small business or start-up, you need to consider the uniqueness of the idea because once you commence, it's difficult to turn back.
Brittney Helmrish wrote about ten ways to Identify a great and unique business idea.
Investing in small business with a new idea should be at the discretion of the investor.
Present and Future market
A new business idea may not have the market at present but could create demand and become a future market leader. Tesla is an example of a business that has future market potentials though currently running at a loss.
A new business idea may not have the market at present but could create demand and become a future market leader. Tesla is an example of a business that has future market potentials though currently running at a loss.
The reason why most tech start-up failed in 1999 and early 2000 was due to lack of mobile phone and internet penetration in developing countries.
However, those which survived are now market leaders in their respective industry with few or no major competitors. A start-up with future market prospects is a good pointer to small business investment opportunity.
A start-up with good current market share could also be a good small business investment opportunity
It's very important to also judge a start-up by its market share because some are in business with the hope that people will like their products in the future.
A recent research shows that 42% of failed start-up believed they failed due to lack of market for their products or services
Experience
Statistically, about 45% of all start-up or small businesses fail in their first year.
Statistically, about 45% of all start-up or small businesses fail in their first year.
Business owners without business experience lacks the basic of strategic management.
Mentoring and consulting could remedy for lack of experience.
Pay back period
This is the period to recoup the initial investment layout.
This is the period to recoup the initial investment layout.
Many start-up and small businesses takes years to break-even.
The choice is left for the investor to determine whether to invest or not on start-up with long payback period.
However, promising start-up should be able to show good signs at initial the stages. A start-up or small business with short pay back period is another way of identifying Small Business Investment opportunity.
Expenditure structure
Some start-up backed with venture capitalist waste so much money on unnecessary expenditures even while running at a loss.
Some start-up backed with venture capitalist waste so much money on unnecessary expenditures even while running at a loss.
Danielle morile, the founder of Mattermark says " she has seen some start-up where the company makes no money and yet their office is ridiculously nice".
Many small businesses will definitely fail.
Though, it is not a crime for small business to fail.
Based on recent silicon valley research, when a start-up fail, it provides an insight to founders in avoiding such errors in the future. At silicon valley, failure is a step toward success.
However, the above point are crucial to avoid investing on a business that might fail.
