PREVIOUS
ISSUES
Investing In the
Net
A couple of articles
back, I talked about how to obtain funding for your Internet-based
business idea. Then, Mike here at Sideroad, asked
about the other side of the coin: "What if it
was your venture capital to spend, would you invest
in any Internet-related businesses?"
When making
any investment - Internet-related or not, you should
proceed with caution. I've seen people get
seriously burned by investing in Internet-related
businesses. Properly managed, well-researched projects can
be a good investment. But, if you are thinking of
investing in an Internet-related business, there are
a few pointers to keep in mind:
Don't get caught up
in the hype. There's something about
Internet-related projects that gets people excited.
They'll risk more and invest more because they see it
as this vast untapped money-making wave of the future.
But, along with the great possibilities, there are a
lot of unknowns. We're still learning what works and
what doesn't on the Net. Make sure that the project
you're considering investing in has good management
and a solid business plan. I'd also be more willing
to invest in a project that is already producing
revenues than one that only exists on paper.
Do some "due
diligence." Research the company thoroughly.
Often, you can ride on the coat tails of venture
capital (VC) - backed projects. Venture-backed projects
have been researched twice--once by the VC
Corporation and once by a banking institution. So you
know that if a VC Corporation is backing a business,
some "due diligence" has already been
performed. (There's an article on this topic at http://www.datamerge.com/financingnews/venturebacked.html.)
Never give a
business your money without a signed contract that
stipulates everything. Have your lawyer look over
it and make sure it covers all the bases and protects
you completely.
Check out the
credit history and background of the owner. If
you're considering investing in a solely-owned (or
one principle owner) business, get references to
their character and past investment relations. You
probably won't have much say in a business if it's
solely owned, so youŽd better make sure the owner is
someone you trust.
Don't invest more
than you can afford to lose. Like any investment,
there's risk involved. If you look at your investment
as a gamble that may or may not pay off, you'll be
prepared if things don't develop as planned.
Decide whether your
investment is a loan that must be paid back or
whether it's a loan that only gets paid back if the
project works. If the loan must be paid back, who
will pay you if the project fails? Either way, set up
a payment plan or dividend schedule ahead of time and
get it all in writing. If your investment is to be
paid back only if there is a profit, make sure that
outside auditing and official financial recording
methods are in place so that you're not just taking
the word of the primary owner(s).
Make sure that the
person calling the shots isn't also the person
holding the purse strings. Money makes people
crazy and absolute power corrupts absolutely. The
combination can make for disaster. Make sure there
are financial records that you can review before
investing in anything.
These are just a few
precautionary measures to take when investing in an
Internet-related business, or really any business for
that matter. Do you have any more you'd like to add?
Send your thoughts or suggestions to me at marniep@pwgroup.com.
