Six Things to Know Before Investing in Emerging Businesses - Davis Law Office

Six Things to Know Before Investing in Emerging Businesses

Six Things to Know Before Investing in Emerging Businesses

We’ve talked about what entrepreneurs should be doing as they embark on their fundraising journey, but what about investors? Investing in emerging businesses can be tricky, too, so it’s important that you’re prepared for the funding road ahead.

Here are six considerations to make before you invest in an emerging business:

  1. What entrepreneurs care about and what investors care about are not always the same thing. And that’s ok. Entrepreneurs mostly care about making sure they don’t lose their company and aren’t prevented from doing what they know how to do if the company sells. That is not always a top priority for an investor, and that’s important to understand before you invest.
  2. Find out what the entrepreneur needs/wants from you. Besides money, do they need someone who particularly knows about inventory? Or scaling a business? Or manufacturing? Find out what they need, and figure out what you want from the deal, and make sure you document it.
  3. The emerging business may have set up the business in the easiest/most tax effective way for them WITHOUT investors. And know that if that’s the case, it’s never too hard to change! If a new type of entity structure would be much better for you as the investor, suggest it.
  4. They may be doing some things that are not efficient. But they’re doing them because they had to do it all when they didn’t have money.
  5. They may not fully understand their financials, and they may not have any assets. The company IS their asset, and if they have money when they need it, that’s all they may have needed to know in the past.
  6. Don’t micromanage. Are you investing because they had a great idea? Then let them continue with that, and only suggest or get involved where you KNOW you can provide value.

Congratulations and best of luck on your investment journey, and know that we’re always here to help if you have questions!

 

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