10 Important Questions to Consider Before Investing in a Company

Unfortunately, few of these fully apply to investing in early stage small businesses. These are criteria used by bankers when making loans to small businesses—which they don’t like to do because of the risk.

I will go through each criterion:

1. Yes! Always important.

2. Impossible on so many levels. Nobody knows-not even large businesses.

3. Also irrelevant. Early startups don’t even do books let alone produce credible balance sheets. It’s not good, but it’s reality.

4. Important, but so difficult to determine over short periods of time. I try really hard to test this. I’m right about 50% of the time. Background checks can be helpful; and references can be good.

5. Also very important, and difficult to discern. But definitely worth including.

6. The “what makes this fail” analysis is a good thing to do, but usually the answers are the same: no cash, founder is a flake, market timing is bad, and go-to-market is too complex and/or expensive.

7.& 8. I so wish this data were available, but it never is. Startups rarely keep track of KPI. It’s all chaotic management and 90% of time spent on fundraising.

9. So valuations have been “out of whack” for awhile. Startups with no revenue are asking for $5+ million valuation out of the gate. This is 2-3x too high with no revenue. With the economy changing so quickly, risk is increased, multiples are dropping, so valuations have to come down. Then, the out year estimates start to make more sense.

10. It’s a crap shoot, honestly. Opportunity cost analysis would cause any potential investor to run in the opposite direction!