How to evaluate a startup investment

So, you want to start the next Facebook, eh? Let’s hope fortune favors you a lot, then. To create a good startup, you’ll need to be in the right place at the right time, have a great idea and also have some money to spare. Here are some ways to evaluate whether your startup investment idea is a good one or if it will end up not doing much besides costing you a lot of time, effort and nerves.

  • Let’s start with a basic question a lot of entrepreneurs overlook: do you actually enjoy whatever it is you’re starting up? If you hate physical work, should you start a roof maintenance and installation business just because there are no other similar businesses in the area? The short answer is no. While a startup idea might look good on paper due to a lack of competition and high demand, remember that you’ll have to put long hours into your startup for it to become successful no matter what – forget 40 hour weekdays and welcome 90 hour ones. Starting a business you don’t like is setting yourself up for failure, plain and simple.
  • Okay, so you found a type of business you could enjoy dedicating yourself to. But is there enough demand for it in the area you’ll cover? Imagine you got a great piece of business real estate in a low income area, and luxury watches are your passion – should you open a store that sells expensive watches there? Probably not. Following your passion is great, but recognizing the area you’ll cater to is just as important.
  • How do your finances hold up against the needed venture capital? Another important point that can’t be overlooked. Too many entrepreneurs will get a loan thinking they struck gold with an idea only to end up out of business and with a massive amount of debt. You might think you found the perfect startup that will make tons of money, but there’s no guarantee this will be the case – prepare a safety net for yourself no matter what.
  • Do you see yourself doing this in ten years? Sort of a follow-up on the first point, but also a point of its own: many successful entrepreneurs are ‘stuck’ to their brand until retirement, for better or for worse. If you recoil at the thought of being in the same line of business come next decade and feel that the line of work is more of a temporary interest, keep looking.
  • Do you see the business going strong in ten years? The times are a-changin’, faster than any of us can remember. Lots of businesses that were doing well around the turn of the century are now faced with an urgent need to change their business model or are flat-out forced to close shop. If you’re investing in a startup, make sure that it’s one that ‘scales’ well with the years, and one that you can adjust as technology continues to evolve – you can be sure that it will.