Equity investors in businesses buy a piece of the business and get a partial ownership in the business. Equity investors invest in small businesses and provide capital to these businesses almost always in the form of cash. In exchange for their investments, these business investors get a small percentage of the profits or losses that the company makes.
When small businesses have a viable business plan for their start-ups, and when they need a funding partner to continue building their business, they look for investors. While it is a tough task to convince investors for paying for your idea and business and investing in it, it is even harder on the other side.
When you are an investor, it is tough to decide which businesses will ultimately take the highway and which will drop dead. As a result, investors are always learning new ways and tactics to determine and predict the success and the failure of the business they wish to invest in.
This year, we bring 5 powerful tips that investors can follow to ensure a prosperous year that is promising and yielding:
- Educate yourself on the opportunity – Investing in businesses is no cakewalk, and if a business is trying to pitch their ideal to you, they most probably weren’t helped by the banks. This is what you need to find out. When you get a clear picture of the story of the business and why they weren’t financially helped by the banks, you will know the loopholes and the opportunity too. This would make your task easy to decide whether or not this is an opportunity to grab.
- Dynamic market or dead market – Learn about the targeted market segment. You need a dynamic market to invest in. If the business is targeting a market segment that would not value the service or the product, it is a failed idea already. The size of the addressable market matters much more than you can imagine. If there are existing solutions in the market that seem to be better than the business proposes, it is better to keep your money with yourself. If the market is a new and emerging one, you can analyse the growth factors that are playing a role in its development and decide if the company in question has those factors.
- The team – Most businesses and start-ups are built with a team predefined. You need to find out more about the expertise of the team and how well they are at what they do. This will help you predict the success and failure of the business since it significantly depends on the team. A strong chemistry and coherence between the team members is an added factor too.
- Business structure – Most investors vouch for this. The structure of the company is vital and that most investors should stick to Limited Liability Corporations (LLCs). This ensures that in the wake of a failure, the liabilities do not fall on your shoulders and you remain financially secure even after the business hits the wall. Also, it is advisable to have the legal documents in place, even if the business in question belongs to a friend or a family person. No deals of investments should be sealed in with mere handshakes.
- Fathom the exit strategy – It is important for the investors to know that a business may not yield profits for more than five years after they make an investment. With this, there must also be an exit strategy so the investor can liquidate his investments as and when he desires. The exit strategy ensures that there is some system in place to give you the returns when the time comes.
With these business investing tips for investors in this 2018, we are sure the year is going to see a lot many start-ups and small businesses springing in many places throughout the world.
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