by By Bill Morrow, Co-Founder and Director of AngelsDen
My first piece of advice to anyone considering investing in a new company is to absolutely find something you either know about already, are passionate about or something that you WANT to know or become passionate about. There is nothing worse than investing in a business that you have no interest in, or even worse, one that you barely understand!
If return on investment and making a profit is your main priority with regards to scoping out your potential candidates, be sure to do your homework. It goes without saying that you should check out all of their assumptions inherent in the ROI calculation. Most of these will be finger in the air estimation in any case, so beware.
If possible, it would be advisable to review the financial history before investing anything into a company. Historic balance sheets and income statements provide valuable insights into the daily operational and administrative costs along with profit margins, current assets and inventory. You can use this information to determine if you will see a return or if a different company might be able to offer more potential for investment.
However, what's more important than any cash flow projection is gut feel and a sense of fun. Chemistry isn’t just a key factor in romantic relationships, it’s also a crucial element needed in business partnerships. More important than the supposed return on investment is whether or not investors get on well with the owner of a company, will they be able to add value not just in terms of cash, but also mentorship, contacts or experience.
You must also consider whether the companies really WANT to add any extra value to their operations? Do they want to hang out with you as an entrepreneur and learn from your experiences, or are they just after a quick way to find cash?
I truly believe that most three year cash flow projections are nonsense, and if you honestly think any business owner CAN project this far forward perhaps you are already preparing yourself to lose your hard-earned money. Furthermore, if a company cannot see the value in your mentoring and business experience then perhaps they don’t deserve the opportunity to work with you at all.