Blindly giving money over to someone to start a business is an exceedingly risky endeavor. After all, most businesses, nearly right after the website is put up and quickly following an unsuccessful trade show to two, go bust.
After all is said and done, most of the time, the money would have been better spent via a charitable donation or two. This is why angel investors require a significant return on their investment and, rightfully so. Upon giving money to any start-up company, as an investor, there are certain attributes that you should look for in the company and the people who are starting the company.
Although aligning these attributes does not guarantee success, it does guarantee a higher success rate. Below, you as a potential investor, will find some corporate attributes or basic factors that any angel investor should consider prior to inking the contract and writing that "start-up" check.
Know the Person, Don't Just Give Your Money Away and Leave Yourself Open to Fraudulent Behavior
If you don't know the person who is starting the business that you are going to invest in, don't pull the trigger. This is regardless of how enticing and cutting edge the idea sounds. Even a third party recommendation can be shaky as you still don't know the personality and business traits of the 3rd party individual.
As a business owner and silent investor who is handing money over, firmly understand that a trusting, cohesive relationship must be formed almost immediately or, more likely than not, the company will not work out. Remember, business investing should be fun and monetarily rewarding, not argumentative and stressful.
When it comes to fraudulent behavior, friends and family are a lot less risky (that is, unless your name is Madoff) and you won't have to spend time and money having your accountant look over the books on a weekly basis. A lack of trust can spread too quickly between yourself and the owner of the company. Also, the moment any trust is broken, you're in for a psychologically hard ride as it is hard to regain trust between the two disagreeing parties.
Thus, it's best to keep it directly in the family or with close ties a.k.a. people whom you consider to be family. A gauge that I believe proves to be accurate is what I call the "Wedding Gauge." If the person was at your wedding, the odds of corporate theft significantly decrease. This is not only because the person has some loyalty to you, but if they were to also act in a dishonest manner, the majority of the people whom they know, would find out.
Needless to say, this type of potential embarrassment is a huge deterrent for the party who would possess to power to steal from the corporation (at least one would hope so). All investors should go into a new business investment clear headed and with a sense of excitement. Most know that things would never get to a point such as the aforementioned, but it's risk management defined and it is necessary.
Make Sure That The Individual Has Successfully Started a Company Before
Upon funding a business, don't give money to just anybody; this is regardless of your relationship. If you want to be hands-off regarding the company, you should always bet on the hitter who is already has a batting average of.290 rather than the eager kid who is still in the minor leagues.
When it comes to opening a business, many people fail because they, although they believe they are, are not ready for all the responsibilities that opening a company from the ground-up entails. It is a lot of hard work, and as someone willingly giving up money, past results should be heavily weighed into your decision as to with whom to start the business.
