Just like trying to gauge if your new product launch will be a success, investing in a business or stock isn’t easy. It’s hard to predict for certain whether your decisions will pay off or not. This is especially true in light of the headline-generating GameStop stock rally that was fueled by Reddit and led to negative PR for trading app Robinhood.
In the wake of the investing frenzy that gave GameStop and other beleaguered brands time in the stock market spotlight, it is more important than ever that would-be business investors learn to discern between good and bad opportunities.
If you’re planning to become an investor in a new startup, however, gaining a more in-depth understanding of what qualifies as a good investment is what will make or break your ability to get a real ROI.
The brand makes you reassess your thinking.
Startups that stand out are those that bring something new to the table.
With this in mind, venture capitalist Eric Vishria advises investors to look for brands whose founders force them to challenge their own assumptions about a market or customer problem. These founders have been thinking about the problem for a long time, and have come to a surprisingly unexpected conclusion.
What starts as an off-the-wall idea has the potential to eventually become the industry norm after the innovators make it big.
It’s an area you already know well.
Though it sometimes feels like this should go without saying, this point is always worth repeating: Don’t invest in something that you don’t fully understand.
A business may say that it has had great initial feedback and is ready to scale, but if you don’t understand the purpose of their products or services, it’s hard to assess whether this is truly the case. When you understand the industry you’re investing in, you can more confidently assess whether a business model has actual potential.
As you gain more experience in investing, you can start to branch out in areas you are less familiar with. But in the beginning, you should stick with investments that more closely align with your own areas of expertise.
They’re focused on an audience or area that is currently underserved.
As part of bringing a new approach to an industry, many startups aim to target demographics that are currently significantly underserved.
This especially stood out to me during a recent conversation with Hiruy Amanuel, managing director of Gullít. Amanuel’s fund focuses on early-stage tech startups in East Africa — a region that has, until recently, largely been ignored by venture capitalists and the tech industry alike.
During our conversation, he emphasized just how much potential for growth there is on the continent of Africa. Visionary founders are present, with creative ideas that are specific to the needs of the continent. Because these companies and their target audiences have been largely ignored in the past, there exists the potential for rapid growth for those who are first to give this area the attention it deserves.
The company has sound fundamentals.
All other factors aside, you must be certain that the company you’re investing in has sound fundamentals. This doesn’t just apply from a corporate structure perspective, either. While a clear and well-defined business plan is certainly vital, the people who are running the startup are ultimately even more important.
Writing for Minutes, investor Winston Ibrahim explains that strong, visionary leaders are the most important factor in determining whether a business is worth the investment. The best founders are humble, flexible, and open to delegation. They understand that they don’t know everything, and are open to mentorship and outside perspectives.
This flexible mindset helps them know when they need to make changes. These founders are worth investing in because they are constantly trying to grow and improve, rather than willing to become complacent.
In the world of business investments, there are no guarantees. A startup could seem to have all the necessary pieces to become a groundbreaking disruptive force in the industry, but an internal squabble between the founders could bring it all crashing down.
While there are no guarantees, using your own know-how and a bit of common sense will help you better identify quality investment opportunities. Following these guidelines will help you come out a winner.