Want To Invest In Early Stage Ventures?

By Author: Kate Ingham
Total Articles: 162
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For investors considering a foray into the speculative but potentially lucrative and personally rewarding start-up/early stage sector, here are some key points to consider, steps to take and key questions to ask.

James Claridge serves as a sponsoring member with Alchemy Equities, assisting SMEs to raise equity capital. James has over 20 years experience in risk management, business valuation and actuarial activity.

These points come from personal experience as an investor in a number of early ventures and should not be construed as financial advice.

1) Does the product really offer customers what is claimed by the company? If the Share Offer document does not provide sufficient evidence of product effectiveness, then ask the company for more evidence.

2) Assess the demand for the product. Is it reasonable to assume that the product will generate significant, long-term revenue growth? Or will it be a fad, with demand drying-up before adequate returns on investment have been made?

3) Check out the Executive and Board. Do they have the collective experience and expertise to deliver ...
... the product to market and to handle the operational constraints that early stage companies face? A board that has a director with relevant expertise in product commercialisation can greatly improve the company’s likelihood of success.

4) Review the business model, including branding, marketing, supply chain, distribution, customers and pricing. Make sure that the company is clear about how it intends to distribute its product and who its customers are.

5) Identify the key risks facing the company. Does the company exhibit basic corporate governance, compliance and risk management awareness? Where possible, have the key risks been addressed?

6) Review the competitive advantage of the company, the competitor analysis and barriers to entry. Is Intellectual Property protected? Is the company focused on building-up its brand so that it can fully exploit its first-mover advantage? Will the company be able to maintain its gross operating margin into the future (given that all successful products are ultimately copied)?

7) Is the company continuing with product development? This is important as it allows the company to leverage of its initial product and to create an ongoing, diversified revenue stream.

8) Review the balance sheet, P&L accounts and forecasts (if any). Start-ups should not be carrying debt, should not be excessively remunerating directors or founders with cash and should not be spending money extravagantly (e.g. business class travel, plush offices).

9) Talk to the founders and directors (as many as you can). Ask them tough questions, based on the outcomes of your assessment of the company’s Share Offer. Assess their dedication and ability to successfully implement the business plan. Lack of cooperation may indicate an unhealthy attitude to
shareholders generally.

10) Review the financial forecasts and the valuation of the company implied by the number and price of shares on offer. Calculate the return on investment over the period to exit – is it reasonable given the risk? If possible, produce your own, simple, projection model and test profitability using more conservative assumptions. If you don’t have the expertise to do this yourself, get some help.

Alchemy Equities Is mounting a Becoming Investor Ready program with the NSW Department of Industry and Investment aimed at NSW-based SMEs – the application deadline for the program is 14 September. Interested companies and business owners should apply at http://www.alchemyequities.com.au

Kate Ingham is the Managing Director of Alchemy Equities, a sponsoring member of ASSOB, specializing in capital raising for small to medium sized growth businesses in Australia. For more information on raising capital for business please visit: http://alchemyequities.com.au/