This is something for those of you who are thinking of becoming business angels, the fact is you will always be asked to invest in someone else’s idea, and it can be very tempting. After all, who doesn’t like making money?
Unless you have unlimited funds, you need to be selective about the businesses that you back. For those just starting out as an angel investor, it is a good idea to do your research before agreeing to fund anyone. There are many red flags that show if a potential business partner might not be trustworthy or if their business proposition simply isn’t viable. This piece gives guidance on how to say no with confidence, whatever the circumstances.
The Importance of Due Diligence
Before agreeing to invest in anyone, you need to make sure they are worthy of your investment. Due diligence is the practice of investigating a business partner thoroughly before investing in them. This can involve anything from researching the viability of their idea, checking the strength of their business plan, verifying their financial status, and even investigating the trustworthiness of their team members. The more you know about the person asking for funding, the better your chances of making a good decision. Even if you know the person asking for funding well and trust them completely, you need to do your research. If you don’t know what you are looking for, you are much more likely to miss obvious warning signs that something isn’t right.
What to Look for Before Saying No
There are several things that you need to check before agreeing to invest in anyone. You should try to do this as soon as possible, preferably during the very first meeting.
Idea Viability – Verify the viability of the idea that is at the heart of the business proposition. Make sure the market needs this product or service, and that there is potential for growth. You should also be able to see how the founders plan to make money from the idea. This will give you an idea of their business acumen.
Market Competition – Make sure the business doesn’t have any direct competitors. If it does, you should check to see if the competitors are stronger than the founders think they are.
Market Size – The market for the product or service should be large enough to accommodate the business. It should also be growing enough to allow the business to thrive.
Customer Segment – Make sure the founders know who the target market is and they have a clear understanding of who the customers will be. You should also be able to see how the founders plan to reach their customers.
Financials – Check that the financial projections are reasonable and make sense. You don’t have to be an expert, but you should be able to see that the founders have done their research. You should also be able to understand the financial model and see how the company will make money.
When You Should Say No
There comes a point in the process where you should decide whether or not you want to invest in the business. At this point, you should have done enough research to be reasonably confident there are no major red flags. If you are not comfortable with what you have learned about the business, you should say no. For example, if there is a strong competitor that the founders don’t seem to be worried about, you should be suspicious. If the financial projections aren’t reasonable, or if the founders’ idea of who the target market is doesn’t make sense, you are better off saying no.
When You Should Not Say No (Yet)
There are plenty of reasons to say no to a funding request, but there are also many reasons to say no, but not yet.
Investment Amount – The founders might be asking for too much money. You might be tempted to say no and walk away, but you might be able to negotiate a lower amount.
Viability of the Business – Your research might show that the business idea has a viable market, and that the competition is weak. The founders might have done a good job of reaching their customer segment, but they might not have done enough to show that they have the business acumen to succeed.
If You Don’t Have Money to Invest comfortably – If you don’t have enough money to invest in the business, you should not commit to investing any amount. This shows lack of confidence in your own decision making.
Conclusion
When someone asks you for funding, you should always do your due diligence before committing to the investment. You need to know exactly what you are investing in, and you need to know the risks. You should always look for the red flags that show the business proposition is not viable, but that doesn’t mean you should be dismissive. If the business proposition is viable, but the founders don’t have all their ducks in a row, you can help them. If you can help the founders make the most of their opportunity, you can make money from the investment, too. That way, you get a return on your money and the founders get a boost in confidence.