Bure Valley Group is an investment introducer platform which links successful investors with exciting, innovative UK startups seeking funding. This content is for information purposes only and should not be taken as financial or investment advice.
As an investor, how do you know whether a startup can weather the various storms that may come its way? Whilst nobody can predict the future, you boost your chances of gaining strong investment returns by checking the financial, commercial and other business foundations of different early stage companies, vigorously.
Below, we suggest ways that startup investors can identify these strong foundations in early stage companies in 2022. We hope you find this content useful. To find out more about our EIS and other investment opportunities, visit our portfolio page here. To enquire regarding our latest projects and funding (for investors and founders, respectively), you can reach us via:
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Exit plan
As an investor, you want to know how you will get a return on your investment (ROI). Here, you can ask startup founders what their long-term plans are for the business. Do they intend for it to be merged with another, larger company one day? Do they intend to go public? What are their target dates for these goals? How realistic and likely are these?
Many startup founders are purely focused on growth in the short term, giving little attention to these key questions. However, a strong exit plan shows that the founders are concerned about stakeholder interests and can engage in strategic thinking.
Legal robustness
Startup businesses can be derailed down the road by lawsuits – such as copyright infringement – if they are not careful. A good startup will be built on strong legal foundations from the outset. This helps to shield from future problems and liabilities which could be deadly to a startup which is still trying to establish profitability.
Here, founders should be able to show investors that they have sought legal advice to get all relevant, up-to-date documents in place and set up an appropriate corporate structure. Patents are also a powerful asset to any startup, as this can help them sustain a competitive advantage later on when rivals might want to mimic their products/services.
Contingency plans
COVID-19 laid bare many business vulnerabilities that had not been addressed beforehand. Many companies went bust, unable to adapt to the new “work from home” environment. Here, investors need to consider how startups may fare in different challenging contexts, over which they may have little control.
For instance, what is the startup’s plan in the event of cyberattack (on the company website or hosting provider)? Could the business easily be moved online if another protracted lockdown was imposed on the country – e.g. to contain a new strain of COVID-19? What is the plan if a war breaks out, like it has done recently in Ukraine? In this case, the conflict is having knock-on effects on global energy prices and food security.
Hiring & outsourcing
Does the startup leadership have a clear idea of what needs to be done “in house”, and what can be done more effectively via outsourcing? Do they have a clear sense of risks and rewards involved with both routes?
The former, for instance, tends to come with higher overheads but allows a strong team to be built. The latter, however, is often cheaper but could involve longer turnaround times and less trust. Savvy business founders will display prudence about how to balance these, appropriately.
Thorough SWOT analysis
Investors want to know that they are investing in startup founders who have no illusions about their business. This means displaying a clear awareness of the startup’s strengths, weaknesses, opportunities and threats (SWOT). In particular, investors must pay attention to founders’ plans to address the latter two.
For instance, are their plans to mitigate increasing competition in their marketplace reasonable? Do they have a robust strategy to source product components from elsewhere if one of their key suppliers suddenly drives up prices (eating into profit margins)?
Good startup founders will not hide these issues from investors, and should show convincing plans to tackle them if they ever come up.
Cash flow
Ultimately, a startup fails or succeeds based on how much cash is coming in versus out. This is the “lifeblood” of any company. Can startup investors demonstrate a history of consistent cash flow. Do they have a plan to sustain and grow cash flow in the months and years ahead?
Of course, most startups operate at a loss in their initial years as their business model gets onto its feet. This can be done if founders effectively manage their funds. However, eventually they do need to establish positive cash flow. Here, investors should look out for revenue forecasts, projections for profits and estimations of costs.
It is a good sign if the founders have sought professional accounting or financial advice, to back up their assumptions.
Funding sources
Startups mainly fail because the cash runs out. As an investor, the last thing you want to happen to your investment is for it to disappear down the drain. You can help protect your interests by looking at evidence such as owners’ credit histories, business savings and qualifications for different business grants. Do the business owners have a range of funding sources and how many stakeholders are involved?
Invitation
Interested in finding out more about the exciting startup projects we have on offer to investors here at Bure Valley Group? Get in touch today to start a conversation with our team and discuss some of the great investment memorandums we have available here:
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