Investing in a business is not as risky as it seems at first glance. Of course, this process requires a professional approach, but not necessarily a lot of money. The fear of making a bad investment or the incomprehension of what type of business is best to invest in leads people who have a chance of success to waste their money instead of increasing it.
How to invest in a business and why is it relevant in 2023?
Active business creation will not always be an option for you. We all become older, our energy levels decline with time, and eventually, we will just grow tired of the never-ending business race. You may decide to appoint a successor to take over your company. By the way, you will have passive income then. However, it will not happen suddenly and unexpectedly; you should take care of this beforehand.
There is currently nothing stopping you from developing a passive revenue stream while running your own business actively. The capital will increase more quickly owing to the reinvestment of the received gains, thus it is best if you do not now require passive income from investments. Having a “financial airbag” that will protect you in case of any issues may also give you greater confidence in your business and allow you to take more risky decisions.
Investors are not “parasites living on passive income.” Investing is a business like any other. One needs to be a good specialist and totally devote himself to this business to achieve success in the market.
In other words, one must actively work in order to get passive income. These are the people who keep a close eye on the financial markets, hunt out profitable trading or investment opportunities, and properly employ them. Over the past year, global changes have taken place in the economic, political, and public spheres.
How can a beginner invest in a business and act wisely in new conditions?
A crisis is a turning point that results from the failure of previous methods of meeting goals and the appearance or rising popularity of new ones. Throughout these moments, there is an opportunity to make the company competitive while the businesses surrounding it fail or quit the market. By doing this, the business may better address the demands of potential clients.
Consumers have a new pattern of behavior in a crisis that businesses cannot ignore: the majority focus on saving money. This first relates to the entertainment industry, which includes restaurants, concerts, and cinemas. Some people have lost their jobs, which has a direct impact on the drop in purchasing power.
In addition to the need for buyers to save money, there are some trends in the market that a future investor should consider while selecting which business to invest in.
1) Mass transition to online
The phenomenon started in 2020 when a pandemic hit the entire planet and businesses were forced to act rapidly to move operations online.
The trend is still gaining steam and can be advantageous to businesses. Owners may lower operating expenses for their business, such as office rent, equipment, utilities, etc. Additionally, the web structure enables them to look for professionals from any location.
2) Development of corporate culture
Due to the generational shift in the job market, where the millennial generation makes up a sizable portion, this trend is becoming more and more common. Since it is crucial for millennials to combine their careers with their personal lives, their top workplace preferences are the chance to learn and grow professionally as well as flexible working hours. This generation craves professional progression, benefits, and the chance to be heard by the employer in addition to salary.
3) Organic Promotion
The rising popularity of social networks has emerged as the primary trend in advertising. In this sense, the demand for content marketing has risen in order to convince potential customers to make a purchase and prove their competence.
SMM promotion in particular has started to acquire popularity, and this pattern will persist in 2023. Nowadays, businesses are more likely to consider how to turn social media marketing (SMM) into a full-fledged marketing channel that would enable them not only to raise brand recognition by expanding coverage but also to persuade potential consumers to make purchases.
How to find investors in a small business?
The main task of the entrepreneur is to clear three questions for the investor:
1) Safety
The investor should completely understand all the cash flows and evaluate all the risks of the future business.
The probability of success is increased if the foundation has already been extensively tested and each risk has been addressed. The following factors, for instance, might serve as indirect guarantees for the investor:
– high marginality of the future business: even with mistakes from which no one is insured, a good margin covers the investment risks;
– the solid business: fast capital turnover, low fixed costs, stable cash flows, and direct dependence of expenses on income;
– a high-quality business system, which includes competent motivation systems, a management system, digitization of business processes, CRM and ERP;
– transparency and openness of assets, the owner is ready to show investors any documents and reports.
2) Profitability
The sales funnel is frequently overlooked by aspiring business owners, which is a critical error. It is advised to create a breakdown in the financial model and exhibit all the figures, from net profit to the number of transactions (sales) of products or services, in an evidential approach, through testing or someone else’s experience.
3) Involvement
Almost no one is interested in investing in a new company nowadays solely to make money. Investors prefer “smart money” and are far more inclined to contribute to initiatives when there is some additional interest on top of the usual profit.
This could involve optimizing internal business procedures, increasing the variety of services offered, breaking into a new market, gaining access to new production equipment and technologies, acquiring a trademark, and other related preferences – anything that will help the investor realize their full potential and strengthen the project. A new company is more likely to prevail in the competition for investment if it can provide something like that to investors.
It is necessary to show a potential investor a business idea and evidence of its profitability. It is best to provide several documents:
– a short presentation for the investor, consisting of 10-15 slides to be sent in the messenger or by e-mail;
– financial plan;
– investment teaser – the shortest possible document, literally 1-2 pages for quick reference;
– evidence – a document in which all theoretical calculations related to the business are supported by specific facts and figures.
How to invest in a small business and not lose money?
Start with a little amount, monitor the performance of your portfolio for six months or a year, and you will be able to choose whether or not you need investments based on your own experience.
Simply do everything correctly from the beginning. You are highly likely to lose money if you follow the advice of family and friends. As a result, you may ruin your investing experience and pass up fantastic opportunities that are truly available to you.
Reading forums is most likely a waste of time. Make sure to create a personal financial plan and contact a reputable financial advisor. Without it, investing is nothing more than a pointless wander around the vast financial markets.
Investing can be conducted through brokerage or insurance companies worldwide. Through stocks, bonds, and various types of investment funds, you can have a joint ownership position in other businesses. You may expand your capital, get passive income, amass wealth, protect it from inflation, develop personal capital, and pass it on as an inheritance.
How to decide what type of business is best to invest in for you
1. If you are unable to decide, the answer is no
The answer is “no” if you are having a hard time deciding whether to invest in a certain business. You can invest in a variety of potentially fascinating projects, so persevere. This does not imply that you will not regret not making an investment in the future.
But future investments will not be any less alluring. As you approach closer to the following agreement, your experience will get richer and better.
2. Your own stream of investment requests indicates that “startups want you”
No investor thinks they won’t receive investment proposals. Choosing the particular businesses you want to invest in is far more challenging.
Startup businesses should desire to invest with you rather than with your rivals. You won’t have access to solid investment prospects without a “they want you” strategy, and you’ll eventually be forced to pick among weak startups.
As a result, you risk missing out on profitable trades and losing money or making only a little profit. Most of your gains will be lost if you miss the best trade. The following sentence from a startup is probably not going to win you over: “I will come to you if I do not obtain money from another fund.”
3. Learning how to invest takes years, but improving takes a lifetime
Start making investments immediately. It will take you years to discover this business’s secret, and even longer to get a profit. It takes time to invest in at least 30 businesses. Start with a modest investment since you may increase it as you build your experience and brand. So, do not expect to see any gains very soon.
4. Valuation Meaning: You will have to bypass future major businesses
Start negotiations with the phrase: “I like this proposal, and although I can not evaluate the project, I would invest if the evaluation was X.” Despite the high valuations of companies, it is still possible to make money through angel investments. If you cannot make money in the tech sector, you cannot make money anywhere else.
5. Take a look at zero-cost companies
Concentrate your efforts primarily on businesses where the return on investment can reach 100 or even 1,000. Alternatively, move ahead. Your portfolio will not be able to produce a return on investment for venture capital that is genuinely sufficient without such significant exits.
6. Market judgment is crucial, but it should not be overvalued.
Certain markets should be avoided because they are clearly less profitable. However, evaluations of the markets are less significant than you may assume because luck and chance are still quite important. In new markets, businesses can perform complex pivots (Twitter, Slack, and Instagram). Doing extensive study and analysis is not the purpose.
You will lose out on a lot if this is all you think about. Learn a few markets really well instead. Obviously, you will become more familiar with new excellent markets as time goes on. However, you must first thoroughly research at least one or more marketplaces.
7. Invest only in technology
Investing in IT businesses offers the highest rate of return. Stay away from startups that do not develop innovative, disruptive technology (software or hardware). Apple, Google, Microsoft, Amazon, and Facebook are the top 5 most valuable businesses on the S&P 500 list. Technology companies are among the biggest private businesses.
8. Some of the most successful investors lack personal opinions
Some of the world’s top investors do not have definite opinions about a particular business. Instead of planning the future, they make an effort to thoroughly “listen” to the here and now. Nearly every businessman in the industry will be more intelligent than them.
The investor’s job is to listen and assess the founders’ intelligence, integrity, and work ethic before considering which business to invest in. These investors are not charmed by the industry. When it is time to launch a new round, they completely revalue the company and disregard operating expenses.
You are on the wrong path if you think about all the things you could do if you were managing a business because you are not. Don’t invest if you’re directing an entrepreneur’s actions. Investors think in a different way than business owners who desire to develop their own business projects.
9. Incentives lead to bad investment advice
The advice you receive from venture capitalists, attorneys, and everyone else is influenced by incentives. They all basically represent their own interests. Other business investors and startup founders are the finest sources of business advice.
10. Play “football” before making the final decision about which business to invest in
Develop your intuition by observing startups rather than making investments in them. You truly make investing decisions based on your instincts. In the past, to witness an outpouring of investment ideas, you would have needed to work for a venture capital firm. Before getting knowledge and expertise, you would need to make a number of investments and lose money. You may now make choices without risking your money.
You may view a lot of offers for investments made by your friends and other investors, and at presentations. To develop your own intuition, you need a lot of data. Keep track of your anti-portfolio and portfolio of appealing offers. Make note of the aspects of each deal that you enjoy and dislike, and see how your response changes over time.
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