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What should you know before investing in a startup?
There has been a series of changes that has evolved over a period of this decade as what actually you should know before investing in startups. When it was in its infancy stage the things to look at before investing was just the market size, which was called the Total addressable market or TAM, which was a benchmark to invest.
The more the TAM the more the chances of success and investors use to fund on the rationale that the startup has a product or service, which can address a bigger audience.
Today before investing in startups the things you need to know are Legality of the company, Team, technology scalability to support the growth, exit strategy, valuation and logic behind valuation.
When investing in startups many a times the traction cannot be used as yardstick as the startup would have just got on in proving the minimum viable product apart from taking decision to invest you need to have clarity on the legality is it pvt ltd or partnership or proprietorship firm, the shareholders and the share of stake in company.
The team is the most critical component as every startup core team will be responsible for bringing success hence having clarity of the team roles and responsibilities.
The current technology being used and to what extent will technology support the structure, usage of technology and the cost factor and how the technology will increase the sales
How will the company exit you as an investor after a period of 3 years at what valuation or how the exit will happen? In fact exit strategy needs to be studied before investing?
The last thing is the valuation at what valuation you are going to get your equity share, what is the basis for the valuation and how it has been calculated and the rationale behind it.
These are the major points, which you will have to look in before investing