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Investing in a startup opens up a possibility of noteworthy returns, but this is not a risk-free venture, and investors must be cautious before stepping in. With no guarantees about whether the emerging companies will take off or push the investors to walk away with nothing, many young investors pace back and forth.

My name is Ofir Bar, and I’ve been an angel investor in real estate and startup technologies for over two decades now. I’ve studied and helped many fledgling startups to help make a mark for themselves in the industry. Although the sector might reap significant returns, it is not a promising enterprise, and almost every novice venture capitalist contemplates before diving into this market.

This article will present some primary factors for young investors to consider while investing in a startup to help them make well-versed decisions.

What factors should investors look for before investing in a startup?

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1. Unique Business Plan

The principal aspect that you should consider before investing is your business plan. Make sure the plan is not just a vague idea but a practical and viable framework of the entire process.

Also, look out for startups with an innovative and unique purpose, which identified the audience’s problems way ahead of time and offered a convenient solution. For instance, Flink is an instant grocery and other essentials delivery company from Berlin, and it has raised the market’s bar a notch higher by offering delivery services in less than 10 minutes.

2. Market Opportunity

Since you will be investing your own hard-earned capital in a startup, you should consider if there’s enough market growth and opportunity for the business. Startups failing to meet this factor will probably mean poor returns for you from the investment, if any at all. If the market size is not large enough, the company might not sustain itself in the long run.

3. Timeline

Behind every successful business’ story, there’s a timeline to draw desirable profits. Although investing is a long-term game, it’s equally important to know the timeframe required for the business to yield returns. While some investors might be comfortable waiting for ten years to receive a return, others may want to see some money within 5-7 years. Evaluating the startup’s burn rate is essential; if the business is still in its early stages and the capital spent every month (burn rate) is exceptionally high, then you’ll probably have to wait longer for your returns.

4. Team Structure

A startup is expected to have limited staffing with only one or two founders. However, it doesn’t mean you should only invest in ventures with many employees. The more concerning issue is whether the company has sufficient skilled employees to cover the most important portfolios.

For instance, if the business is rooted to develop the subsequent use for blockchain technology, does the staff have an expert in a digital ledger? Every enterprise needs to have at least one skillful employee in each department, especially in the critical aspects of the business. This will also ensure continuity of skills in the company.

Bottom line

Investing in emerging startups can be beneficial for you, if you are looking to diversify your portfolio. However, it is not a risk-proof game at all. And so, I, Ofir Bar, like to suggest young investors examine these along with a few other aspects before diving in. The importance of performing detailed research about the firm before financing should not be overlooked.