My answer to What are the essentials of due diligence when investing?
Answer by Raad Ahmed:
There are virtually countless things that will equate to due diligence when you consider any type of investment. As other answers have indicated, everybody has their focus areas that will vary based not only the type of business, but also the personality and preferences of the investor.
With that said, here are a few areas of importance:
- Pay attention to what isn’t being said. When a startup pitches their idea, you should be weary of any founder that doesn’t mention potential risks, discuss their background, or explain the advantages of their team members. Be weary anybody that offers unrealistic projections or only focuses on the positives of the business We all know that the earliest days of development are full of learning curves and trial and error. You want to work with people who are real about that.
- Consider personalities. This seems to be an overlooked concept because so many people assume that business is only numbers. It isn’t. You should have a basic idea of the type of person that you are working with. Is the founder a reckless risk taker? Too conservative? These are things that will impact the future of the business overall and should not be ignored. Take the time to have a real conversation with the founder and other member to make sure that there is potential for a cohesive working relationship.Basically, make sure you “click”.
- Does the concept work in the marketplace? It’s easier than you may think to get locked in on the charisma of a founder and excited about their idea simply because they do an incredible job of selling it to you (which is important, by the way). However, don’t forget the reality of business. Consider if their overall concept works well in the marketplace. Is there product/service solving a problem? Is their idea unique enough to gain traction? Don’t forget the realistic side of things even if the person in front of you is likable, excited, and experienced.
Of course, there are many, many more things that you should consider. A business attorney can definitely help you navigate the waters if you are interested in investing in a startup. Plus, it’s always a good idea to have a professional read over any documents or contracts before you sign on the dotted line.
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