While success is the favorable outcome for a new venture, it’s the return on investment that comes with that success that must inspect closely. In order to understand the potential return it’s important that one looks at the risk and potential upside that the business may have. The key to a strong overall investment opportunity is the ability for an investment to generate strong returns for the investors with minimized risk for downside. (Call it value investing if you want, but the key to profit is buying into a venture at the right price.) The profitability of a venture investment is influenced by; total funding requirements, the corporate structure, the existing shareholders, debt, valuation, type of financing instrument, liquidation preferences, partners, shareholder voting rights, legal issues, existing company assets, balance sheet protection, and the type and structure of board controls. This may be only one of 8 categories we look at in terms of identifying a solid opportunity, but it is by far the most important.
The purpose of this first element on this topic is to make sure that the company is formed as a legal entity and is in good standing with state and federal agencies. Some of this data will turn up in a simple background check, but this is more of a “pass or fail” element with some exceptions (i.e. acknowledgement of corporate structure issues and a very clear and rapid plan to fix the problem).
If you are unfamiliar with the basics of structuring a new business then your next stop should be at Michael Spadaccini’s article at Entrepreneur entitled “The Basics of Business Structure.” It’s a great resource that provide the pros and cons to each type of business structure and is a good place to start if you’re thinking about launching a new venture.
This is just one of the key criteria forward-thinking investors use when evaluating the strength of entrepreneurs and their new ventures. How do you measure up? Go to www.venturephenomeproject.com to read all 80 criteria and swap knowledge with other entrepreneurs & investors.