The 7 rules You should use to invest in Private Equity start-ups

The 7 Rules, You should follow, to Invest wisely in Start UP’s and Private Equity, which all Private Investors should know.

I once met an Old School Stockbroker that specialized in Enterprise Investment Scheme and Small Company stock issues. He told me that of the 25 years in broking most of his clients had lost money investing in small-capitalized companies.

I contrasted this with my experience in Private Equity where the company, which I worked for, worked closely with private investors and business angels. Most of the investors were High Net Worth Individuals and or sophisticated investors who had made several investments.

For those new to the game we provided them with important points on what to look for in a new business.

Many investors lack a structured route that they follow when they invest. Typically they will read an article in the Mainstream Media, or an investor forum. Sometimes the invest it’s because they like the idea or know the industry. One of the worst reasons for an individual to invest is just for any tax breaks. There is no point in having generous tax breaks on investments, if that investment has a high probability of failure due to poor due diligence.

So here are the 7 criteria you should consider before investing:

1. The Business idea. A good business idea for an entrepreneur or investor is like seeing a £50 note laying on the ground. Your first thought is: “Is this genuine?” Then “Has anyone else seen this?” and then “Better snap this up now before someone beats me to it”. The Business idea has to resonate with you. Maybe you have knowledge of the concept, or that it just sounds right. Often times it seems so obvious.

2. The Market; is this an environment that is growing, is the market very competitive, are the barriers of entry very high. If so it maybe where most of the capital will be tied in. Who needs to break into the typewriter business nowadays?

3. The scalability – in private equity you want to be a grizzly bear not a teddy bear The business should have the capacity in which to grow and grow big not be a small profitable cottage industry. The technology sector ticks a lot of boxes, in this regards ,because of the scale potential is vast. The likelihood of being able to grow in terms of the number of customers or the volume of sales will be the making or breaking of many a Business with a great idea.

4. Now you should turn to the financials. This is where you put your head under the bonnet and ask are the figures adding up? If the businesses figures are not correct or do not make sense then this is a question mark on their ability to manage matters financially. Also, it provides a window to their perspective relative to the Market in which they are looking to enter.