What You Need to Know About Start-Up Investing

By Douglas Goldstein, CFP®

In a dramatic repeat of what I saw many times in the late 1990s-2000, another start-up company just collapsed, taking with it millions of dollars from investors’ pockets. Not only are the founders’ dream shattered, but its investors’ profits are destroyed and cash lost.

As a financial advisor, I review many new companies from the investor’s viewpoint. In almost every case, the story ends badly.

Don’t invest unless you know how

The main cause of these disastrous results stems from investors putting their money into an idea instead of into a team. Many great ideas fail because of bad management, but lots of new concepts – even mediocre ones – turn into solid businesses when handled properly. Venture capital professionals won’t even consider investing in a company unless they’re convinced that the team running it is qualified and has a robust business plan.

How to analyze a business plan

If this article is your only lesson on how to evaluate a business plan, then you certainly aren’t a candidate to be an “angel” or venture capital investor. People spend years refining their skills in how to analyze business plans and offering documents.

VC pros never start by reading about the anticipated profits of the start-up, since these projections lack real substance. Instead, they look at the salaries that the team hopes to make (all taken from the investors’ money) and how the money will be spent. The case I recently witnessed showed how the investor didn’t consider those two most important factors before dedicating his money. The failed company significantly overpaid all of the team members and blew large sums of money on new offices and unnecessary state-of-art equipment (when other cost-efficient equipment would have been satisfactory in producing the same product).

Still want to invest in a start-up company?

In my weekly podcast about how the strategies of chess can be applied to investing, I have dedicated Episode 85 to start-up investing. Check it out at www.RichAsAKing.com/85.

Douglas Goldstein, CFP®, is the director of Profile Investment Services, Ltd. He is a licensed financial professional both in the U.S. and Israel. His best-selling book, Rich As A King: How the Wisdom of Chess Can Make You a Grandmaster of Investing, is available at online, at bookstores, and at www.RichAsAKing.com. Call (02) 624-2788 for a consultation about handling your U.S. investments from Israel. Securities offered through Portfolio Resources Group, Inc., Member FINRA, SIPC, MSRB, FSI. Accounts carried by Pershing LLC., Member NYSE/SIPC, a subsidiary of The Bank of New York Mellon Corporation. The opinions expressed are those of the author and not those of Portfolio Resources Group, Inc. or its affiliates.