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Due Diligence Checklist for Startup Investors

Startup investing is a risky business, and there’s no secret recipe for success. Moreover, finding the right company to invest in only comes down to good old-fashioned experience. However, this doesn’t mean one should be reluctant for investing in startups. By following expert guidelines and conducting good research first time investors can successfully eliminate risks and avoid failed investments.

Here are ten important guidelines, which you can use as a checklist for your startup investment due diligence:

1- The first step in conducting due-diligence for a startup is to critically evaluate its business plan. Analyze and assess the revenue model and growth strategy and make sure that the startup has a bullet proof story!

2- Make sure that the economics of the idea is well translated into real world returns, i.e. some new ideas are so uncertain and have high risk of gaining market adoption. Preferably invest in ideas that solve a real world problem.

3- It is important that any business you invest in is a one-of-a-kind with a specific market cornered. Consider the competition, the stronger the competition is, the tougher the market entry will be.

4- Pay attention to legal, regulatory, and compliance issues, i.e. it is important to consider for brand new ideas, such as the regulatory hurdles faced by Airbnb and Uber.

5- Look for proof of their marketplace claims. Compare financial data, market acquisition stats, brand outreach and end users’ feedback!

6- Choose what you really know well about, i.e. focus on companies that are in your specific area of expertise. Doing this you are in a better position to accurately predict a company’s future, analyze their risks and find potential areas for growth, and thus make better decision.

7- Meet the founders in person and analyze their personality, because their skills, knowledge, and passion is what will carry them through periods of growing pains and discouragement.

8- Don’t get distracted, because many businesses that look promising in the early going can fail. Only invest in promising startups, i.e. a business that not only has a great product or service, but also a great team, a clear-cut market and a plan for growth.

9- Since, it’s all about numbers and a thriving business today can fall tomorrow due to a fickle change in the marketplace, so you must know when to harvest your investment.

10- Consider having investment partners; split your investment, risk and return, but that may not be a good idea in case of an outsized return.

11- Since only 10% of startups succeed, so it is important that you have an exit strategy for getting out of an investment in a failing company.


The Bottom Line:

As a fact of the matter, there’s no real science behind startup investing, but only learning from investors’ experience and reading success stories you can increase your chances for success.

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