Investing in a business is never without risk. Regardless of the business plan, the founder’s previous business ventures, and the traction for the business, there is still a possibility that the business can fold, at any stage.
While there is no way of completely eliminating the risk for investors, there are several ways that platforms and investor networks can aim to mitigate investor risk.
Here’s how Shadow Foundr works to mitigate investor risk.
Firstly, Shadow Foundr ensures that only the best investment opportunities get shown to investors, by vetting all the companies that apply for funding. Shadow Foundr question the business in depth, asking questions such as:
- What is the current valuation of the company?
By revealing to Shadow Foundr how much they believe their company could be worth, the founder is putting all their cards on the table. Using their vast experience, Shadow Foundr is then able to assess if the valuation is realistic and has the potential to grow and make investors a healthy return.
- What is your track record and team?
This is key. Shadow Foundr and other investor networks need to assess the founder’s previous business ventures. If they have no history in running a business, this can be risky. However, if the founder, or their team, have previously run businesses successfully, this can be reassuring, as they have experience. Knowing this is essential for investors when it comes to deciding where to inject cash. Of course, there’s no guarantee that a founder with excellent previous business ventures will go on to run their next business well, but it does help if they have experience.
- Is your model going to disrupt the sector?
If the founder has invented a ground-breaking product that will revolutionise the world forever, then this could result in a lot of publicity for the business, and the product being worth a lot of money. However, the risk with disruptive products/models is, if there’s no evidence of how well the product markets, it could flop. Likewise, a solid, non-disruptive model could flourish due to its quality, or get lost in market saturation.
- How much equity will be given away?
It’s essential to know how much equity the business is planning on giving away, in order to assess if it’s worth the investor putting their money in.
- Are there patents in place?
Having patents in place for a new invention is crucial. If the business hasn’t secured patents, they run the risk of someone else ‘inventing’ and subsequently patenting their idea. Being aware of and protecting intellectual property makes the whole investment process more secure.
- Breakdown of where money will be allocated
It’s vital that the company can demonstrate where they plan to inject the money, be it manufacturing to marketing, production to publicity, and everything in between. Once the company has shown this, Shadow Foundr and subsequently the investor can assess if the breakdown is feasible and will help grow the business.
- 3-5 year cash flow projection
Having a clear and easy-to-follow 3-5 year cash flow projection will show how much time the business has invested into thinking about finances, and is a clear indicator of their grasp of finances. This will flag up any holes in the founder’s business knowledge.
- Are there any plans for future rounds of funding?
This is particularly key if the investor is worried about dilution of equity, as a second round of funding would most likely result in dilution of the percentage of the business that they own, unless pre-emption rights are exercised. More importantly however, all early stage businesses need a funding plan to take them beyond revenue stage.
- What is the exit strategy?
Knowing if and how the entrepreneur plans to sell their business is key for the investor, as eventually they will want to see their capital returned, as well as any potential upside for their risk.
By asking all these questions to the entrepreneur, and getting concrete answers, Shadow Foundr is able to vet business opportunities and ensure that they will work to their best potential. Any holes or flaws in the business plan can be ironed out and addressed early on, to also help protect investors and mitigate risk.
Join Shadow Foundr today for your free Guide to Equity Investment.
By Rachel Stone for Shadow Foundr