Investing in a business brings with it potential risks together with the lure of significant returns. Whether you are investing in a startup or an existing business, you can never predict with surety whether you will get a profitable deal or walk away with nothing. Yet, you won’t find a dearth of venture capitalists and angel investors. If you too are planning to invest, here are 5 questions you should ask the business where you plan to put in your money:
- What’s my level of involvement? Depending on the type of investment, your level of involvement would vary. For example, if you invest in a new business via a venture capital firm, you would need to have restricted interaction with the core team running the show. However, if you are an angel investor who has an equity stake in the company, you will be a part of the startup’s leadership and involve yourself in decision-making. So, it’s important to get a clear idea of how much or how little involvement you want.
- What is the investment timeframe? You need to get some idea about how long your investment horizon would be. While some investors may not mind waiting for 10-15 years to realize a profit, others may want it to happen sooner.
- What’s the expected ROI? Making money (via profit) is a big reason that drives investment. While calculating potential ROI, costs associated with investment should be taken into account (like fees charged by crowdfunding platforms for letting users use their services or annual management fees applicable for venture capital investment etc). Type of investment too pays a big role in deciding your potential ROI.
- Is there a scope for investment diversification? Any good investment portfolio should have diversification of asset classes to spread out the risk. Thus, before you invest, find how the venture plans to diversify its overall asset mix and the kind of risk level it involves to minimize your risks without limiting your returns.
Is there an exit strategy? A clear exit strategy should be part of any investment. So, learn how and when you can withdraw your investment along with the associated gains, if any. You should also find the time frame involved for such exit and check if you are comfortable with it before you decide to invest.