How to Spot an Investment Opportunity

Whether you’re targeting a newborn startup or looking to invest through a network of private investors, knowing how to spot the next profit opportunity is a key consideration for aspiring entrepreneurs. 

Amid the sea of possibility in the startup sphere, the number of possible avenues can at times be overwhelming – and how do you decide which ones have the best chance of success? Of all the companies pitching their prospectuses to a liquid body of investors, the latter need tools to allow them to assess, a set of criteria. Even experienced investors understand this is a complicated task. We have narrowed it down to the main criteria which can help you spot a profit opportunity. These may be your tools for uncovering the next big thing.

A foremost consideration is the market need of an industry – whether the product or service solves a problem. CB Insights partnered with KPMG to research the reasons of failure for over one hundred startups – the number one reason for their failure (42% of the companies surveyed) was lack of market need. Regardless of how savvy or well-presented the prospectus may appear, you’ll need to independently research the sector in which the company is looking to operate – is this a product that people genuinely want? If so, you can invest with more confidence that the company has what it takes to succeed.

Furthermore, you must carefully assess the company’s strategy; its exit plan, its approach to management, and its ownership. If the company has failed to consider its stance on these issues prior to launch, then they’re not fully equipped and will not likely succeed. When it comes to their exit strategy, ask whether there is a clear plan in place, whether there is a definitive timetable or pathway – these are important questions from the outset. Also, if you’re looking to be a hands-on investor, you may demand more information on the experience of the team. Startups demand a combination of both bold vision and administrative talents – one without the other is less powerful. Finally, ensure the company has established clearly its ownership structure – withhold your investment until any controversy over ownership, whether copyright or otherwise, has been determined. This a key threat to stable investment, and your investment could be worthless if you fail to consider this point.

Finally, look at the inherent risks involved in relation to the company’s product, services, and industry. There are several main ‘buckets’ of risk that can affect a company’s livelihood. The first one is the company bucket, requiring you to look at any risks associated with the company’s founders themselves, their backgrounds, and their expertise. Then, look at the industry’s risk – is this company sustainable within the context of the industry? Consider any barriers to change, whether through regulation or technology. Next, consider the inherent financial risks – look at when the company will be able to raise money, at what valuation they can achieve this, and whether the company would look to an IPO. At the outset, it can be near impossible to predict the state of the industry in the five to seven years time when your investment may be able to be liquid.

These criteria are powerful tools to assess profit opportunities.

Looking to the market need, to the company’s strategy, and to the inherent risk attached to the sector and the individual product/service, will help you make the most informed investment possible. 

Ultimately, remember to seek independent financial advice and always thoroughly read the materials provided to you by the company.

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