There’s a certain thrill to investing in a company. It presents a new challenge, a chance to help an idea grow into something more, a learning opportunity and of course with the right sort of investment, a chance to make money.
That’s the key thing though. The right sort of investment. Essentially, it needs to be a success. How do you know when a business is worth investing in and how do you give yourself the best possible chance of ensuring you can some sort of return on that investment?
Here are five tips that can help you with a successful business investment.
Look at who is backing the business
If you come across a big brand backing a startup, chances are that it is going to have a real shot at success. This list of the 14 big brands helping small startups gives some idea of what to look for, with the likes of Amazon, American Express and Coca Cola being particularly noted for their success in terms of backing small businesses. The reputation alone of backers isn’t the be all and end of course and many smaller brands will have just as much success backing startups as the big boys do. Do your research into the business you are considering investing in, find out who is involved and then make a decision that suits you best.
Wait until a company’s lock-up period is over
During a lock-up period, owners of a company’s stock are forbade from selling it. By holding off investing until a company’s lock up period is over, you will get some indication of the its chances of success. If the current stockowners abandon their shares once the lock-up period is over, chances are it isn’t looking good for the business. If they hold onto their stock, then there is obviously confidence in the business which is a positive sign when it comes to investing.
Read the company’s prospectus
No business prospectus is fun to read, but it is vital. From this document you can gather how a business is run and most importantly, what the plans for it are moving forward. From there, you can make your own personal judgement on whether it is likely to succeed and consider whether it is worth your investment.
Know when to get out
With every investment, there is the risk it could go wrong. If that’s the case, make sure you come up with an exit strategy for knowing when to pull the plug. Even if it goes right, you’ll want an exit strategy. Sector Valuation Multiples can help you know when to sell your stake for maximum profit.
Most important of all - be patient
You need to be patient in several different ways – be patient when it comes to finding the right business to invest in. This may take some time, but a rushed and rash decision could have severe consequences for your financial returns. You also need to be patient when it comes to expecting returns. It’s more than likely that it will take at least a couple of years for you to see a return on your investment. They say patience is virtue, and that is never truer than when in investing in a business.
