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Investing

Investment risk capital and how to use it

When you’re looking for likely funds to invest in, start-up businesses may be a tempting target. With unproved businesses, though, you should be careful about investing. Investment risk with capital for new businesses is considerably higher than risk when investing in more established businesses.

Capital is the cash used to finance the startup of a business, and may be used for equipment, land, rent, salaries, stock, or whatever else is necessary to get the business off the ground. Most people who engage in investing investment risk capital are called venture capitalists. There are good and sound reasons for investing capital in an unproven company. For instance, a startup company that holds a patent on an innovative new idea would be worth investing in; the patent can act as collateral for bonds or loans, and if the company falls through, you could be eligible (depending on your contract) to receive proceeds from the sale of the patent.

However, investing your investment risk capital with a new company is gambling on the company’s future. There are several things you can do to limit your risk of losses if you do this.

  1. Invest in companies that have intellectual capital or social capital. Intellectual capital is a patent, trademark, or copyright on an item that holds some provable value. Social capital is basically a good name: a CEO who has great connections in a business you can depend on to make money, for instance, or a startup that owns a well-known brand name.
  2. Take your time choosing a business to fund. Most venture capitalists fund about one in four hundred companies that come to them. This allows you to be extremely choosy about which companies you invest your investment risk capital in. You should look beyond intellectual and social capital, focusing on how the business is to be run, who’s going to run it and what their track record is, and anything else that might affect the business’s success in the future. You should be able to find all this information in the business plan. If it’s not included, you should look at other companies.
  3. Meet with the leaders of the business you’re considering for investment. Try to get a feel for how well they know the industry they’re striking out in, and how well they really know their own business plan. Business plans are often written by consultants, and the company officers, surprisingly, often don’t bother to read them. These are the businesses you want to write off.
  4. Most importantly, try to get a gut feeling for the company. If you don’t feel a hundred percent confident in the business, don’t invest in it. Take your time in finding a company that you think will take off.