title:A Guide to Investing in Startups author:John Mussi source_url:http://www.articlecity.com/articles/business_and_finance/article_4754.shtml date_saved:2007-07-25 12:30:07 category:business_and_finance article:

Investing in startups carries a certain element of risk. If you’ve ever received an opportunity to invest in a startup company, you might find yourself wondering whether or not it’s worth the risk to invest your money into a business that’s still trying to get off of the ground. By their very nature, most startup businesses are more prone to miscalculations and unexpected problems than more established companies? some don’t even make it through the end of their first year.
This does not, of course, mean that it’s not worth your time to invest in a startup business if the opportunity presents itself; it simply means that you need to approach the matter with care and make sure that the opportunity and business are sound.
Below you’ll find a few suggestions that can help you to determine whether the startup opportunity that you face is worth the risk.
Considering the Business Model
Most startup companies will prepare a business plan for their potential investors to read through and consider when deciding whether or not to invest in their company. This business plan will include their projected expenses, potential profits, closest competition, and the general plan that they have for organizing and running the business. This last portion is known as the business model, and is one of the first considerations that you should have when trying to determine whether the opportunity is a good one or not.
Read through the business model several times, envisioning the structure that it proposes; if you can see it as potentially succeeding, then the matter is worth further consideration.
Should you find flaws in the business model, however, you might want to be wary? if the business can’t make money, then your investment won’t make money either.
Analyzing the Opportunity
Assuming the business model is secure, you should then begin to look at the investment opportunity as a whole. Are the amounts that the business owners are requesting reasonable? Does your investment allow you any sort of voting rights, limited partnership, or legitimate voice in the running of the business? How many other potential investors have the same opportunity as you do?
Taking the time to consider the various ramifications of investing in the startup company will help you to determine whether you can actually afford to make the investment in the off chance that your return doesn’t match your initial investment.
Weighing the Risks
Once you’ve considered the questions about the investment, take some time to consider the various things that could go wrong with the business model. Take into account the competition that the business will be up against, any potential oversights or other underestimations by the business owners, and the community that the business will be serving. Determine whether there is a significant chance of the business failing or performing poorly or whether there is a greater chance of success than failure.
Once you’ve compiled the various risks that could be associated with investing in the business, it’s time to make your final decision as to whether or not to make the investment in the startup company.
Deciding Whether to Invest
Taking into account the chances for success, the various risks, and the solidity of the business model that the startup owners have designed, you can make your final decision as to whether the investment is right for you.
If you feel that the risks are to great or that you can’t afford it, don’t make the investment. If, however, you determine that there’s a good chance of success, feel free to make the investment and see what happens. It’s your money? use it wisely.

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