Factors to Consider when Making Investment in New Business

The exceptionally high returns achieved by new business investors in the recent years have triggered a lot of interest in the investment community in new business opportunities. Many different funding methods are used to get the new business off to a good start. Investors may be interested in seeking a part of the ownership of the start-up business.  Wealthy individuals who look to invest in new businesses with high growth prospects are known as “Angel investors.”  A group of people raising a fund for investing on new businesses are known as “Venture Capitalists.”  Each of them has different sets of expectations and terms for financing new businesses.

The Idea

The investor looking for good return on new business investment must first ensure that the new business idea can provide a solution to a problem in the market. The new product or service or technology should be able to sustain and succeed in the long run in the prevailing market climate. The new business proposals in unfamiliar areas should be sent to an expert in that field to determine if the project is worthy of investing.

High return on investment

The success rate of start-up businesses is very thin and therefore investments carry a very high risk.  High risk businesses also have the potential to give high returns. Generally these investors obviously expect high return on new business investments and carefully check the business assets, revenues and financial condition of the promoters. The angels may also provide inputs to the new business’s management for high performance in the market in the shortest time as they want them to win. Several different kinds of deals are signed between the entrepreneur and the investor.   Angel investors expect a percentage stake in the ownership of the company they invest in.

Scrutiny of Business plan

The business proposals with strong financial performance are likely to attract the interest of an investor.  The business plan should be realistic and based on the market conditions. The track record of the management team or the business owner should be impeccable and show promise.  By carefully evaluating the business plan the investor analyses the concept, profitability and growth prospects and potential for success. The business proposals with long term goals laid out and clearly defined exit policy are the ones that get the funding.

Legal aspects

The investor should satisfy the legal aspects of the new business before making an investment.  It is important to verify the background of the new business owner and the intellectual property aspects for compliance with law.

High risk tolerance

With a lot of uncertainties surrounding the new businesses in the start-up stage given their limited operating history and cash flow it is hard to determine their potential for success.  Too many things like expenses, untested competition and delays can slow or hinder their progress.  A high degree of risk tolerance is required for investing in new businesses.

When it comes to investing in new business, it is better to go by ones instinct and to invest in ideas one is comfortable with.