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15 rules about investing in business for aspiring investors


Greetings, dear readers!

Kristina Bulankina, editor Seryakov | Investments. Today we will talk about how a beginner private investor can avoid mistakes and minimize risks by investing in small and medium-sized businesses.

At the end – a checklist based on our experience, which will help you to correctly select and check a potential company for investment.

The material will be useful for those who choose a reliable business for investing money and want to know about all the “pitfalls” before making a deal.

  1. Invest in an industry that you are good at

It will be easier for you to understand the processes, numbers and results if intuitively, based on life experience, you understand what the company is doing.

Imagine: you work out in a fitness center, you like everything. Comfortable exercise equipment, effective fitness programs, competent trainers, pleasant social networks with relevant news, an acceptable cost of a club card. And then you find out that the owner of the center is going to open an even larger sports complex with a swimming pool.

+ You already like the product that the fitness center sells.
+ You understand how the processes inside this business are debugged.
+ You highlight the criteria by which customers choose this particular center.
+ See the number of real users of the product.

This area is close to you, you understand it, it is more difficult to deceive you in it.

Choose it for investment.

2. Choose companies that are located in your area

At the stage of getting acquainted with the processes of investing in a small business, you should have the opportunity to come to the company and personally make sure that it works “like clockwork”.

Getting acquainted with the business from the inside, regularly visiting production, you can assess how well-adjusted the work processes at different stages are, how the business communicates with customers, how it builds the advertising, sales, and marketing process.

After the fact of investing, it is also important to be able to visit the company to see what your investments are spent on, how the business is changing and what result it gives.

Some of our investors think so: “If this business is not in my region, then it does not exist at all.”

3. Invest in “fundamental” business areas with eternal markets

Using the 2020 pandemic as an example, we made sure that, in general, people can refuse a lot, but they will never stop eating, drinking, dressing, being treated, living in apartments and houses. The areas of these “services” were in demand 50, 100, 250 years ago and will be in demand in the future. Conditional liquid for vaping or spinners are hype products with a high level of margin at a particular moment, but it is difficult to predict how quickly this popularity will end.

4. Meet the founder of the business in person

A business must have a face. The owner should not hide his passport data, biography, history of the establishment of the business and his role in it.

And your task is to make sure of his professionalism. It is important to understand that he deeply understands what he does, that he “lives” with this business, “breathes” with its success. You have to catch his entrepreneurial enthusiasm and burning (within the framework of common sense) eyes. His plans should look realistic, the path to achieving the goal should be objective, and his views on the development of the company should be reasoned.

Andrey Kornyushenko, owner of our portfolio company LLC “Sugar Company Stolitsa”

Meet a real person and make a general impression of him.

5. Do a legal due diligence of the company

Services like rusprofile.ru and zachestnyibiznes.ru will help you check the company’s reports on revenue, turnover, profits, taxes. There you can also get reliable information about lawsuits and proceedings.

6. Start with the amounts you don’t mind losing

Investing is always a risk. And the responsibility for the decision made lies only with you. No one can give 100% guarantees of making a profit and returning the entire amount, no matter how loud slogans are convinced by businesses or investment companies. Be prepared to lose money and start with the amounts that you are potentially willing to pay for the experience.

To minimize risks, do not invest large sums in one business. The conditional 2 million rubles can be diversified by investing in 4 companies 500 thousand rubles each.

7. Request business documentation and note what will be sent to you

In an ideal scenario for developing a relationship with a business, it should be transparent for you. You should see the owner’s openness, willingness to provide information and understand that you are getting the data you are asking about, and not random reports and statements.

If you are fed with promises or not sent what you are asking for, this should be alarming. The company may be playing for time by hiding real data or falsifying documents.

8. Invest in something that has been working for a significant time.

The realities of small and medium-sized businesses in Russia are as follows: in the first year of operation, 97% of young companies close.

If a business has existed on the market for 3, 5, 10 years, it has already successfully overcome at least 1, or even 2-3 crises, has gone through several stages of development, formed a competent team, took its place in a niche, adjusted the supply / production / sales processes , won the consumer’s trust.

Invest in what is already working and wants to develop, and not in ideas, ideas, startups.

9. Watch the business for a while, don’t invest right away

Even without leaving home, you can analyze the “quality” of the business. Google news about the company, evaluate the brand’s media, read social networks, websites. Study on what platforms or in what networks the product is sold, how accessible it is from a logistics point of view, whether it is easy to get to offline points of sale.

Don’t make the investment decision right away, take a closer look.

10. Look for reviews of the business, product, and entrepreneur

With access to the Internet, you have access to a huge number of opinions and reviews. Pay attention to customer reviews, suppliers, product reviews, about the business in general.

If the company has experience working with private investors, this is an important advantage. You can ask for contacts of existing investors, talk to them personally and put together for yourself a big picture of the business.

In this way, you can learn a lot of interesting things.

11. Ask why the business does not take loans from banks

Private investors ask for higher rates of return than lenders in banks. Therefore, the final investment decision may depend on the arguments that will be given to you in response to this question.

The most revealing answer that we have ever heard: “I want to share the risks. Friends and banks will definitely have to give back. “

Obviously, investing in such a company is not worth it.

The opposite situation: the business is already a borrower of banks, successfully servicing its loans, but needs much larger financial injections than banks can provide. He turns to private investors, receives investment, uses it wisely, increasing turnover, and gets a higher profit, which allows him to easily fulfill his financial obligations.

12. Ask for a company development plan

To assess the reality of the implementation of the plans that are presented to you, you need to understand the retrospective and compare it with the current state of affairs.

There should not be a strong gap between what is happening now and what is expected in the future. You can’t fly into space in the evening if you crawl on the floor in the morning. A running business has normal, organic, healthy growth both before and after your investment.

We regularly come across “businessmen” with 0 rubles of proceeds who are looking for 500 million rubles of investments for the urgent construction of an oil production plant. Such “companies” do not pass our test.

Assess realism and common sense in your development plans. By the way these plans are configured and presented to you, you can gauge the way of thinking of the person who made the plan.

13. Pay attention to business openness

Evaluate whether they are hiding any information from you: whether you are offered to come to the warehouse / production / store, whether they allow you to communicate directly with employees, whether they allow you to check the company’s internal documentation.

If everything in communication is open, it promotes mutual understanding and trust. If not, then they are hiding something. It is not worth risking your money by investing in such companies.

14. Analyze the client “shell” of the business and follow the “customer journey”

Leave a request on the site, rate its convenience. Wait until they call you back (if they call you back) and evaluate how professional the manager who communicates with you is. Pay attention to whether you have a desire to buy a business product. Evaluate the points of contact with the company: outdoor advertising in the city, social networks, contextual advertising, Internet sites. And as a customer, would you be satisfied with the product?

Even if you are a novice investor, life experience and critical thinking will be enough to understand what is in front of you: a well-packed “Potemkin village” or a really working business.

15. Ask a lawyer to check the documents before closing the deal

In case of your positive decision to invest in a particular business, do not skimp on the services of a lawyer or investment company. Agree and check the terms of investment (loan or share), guarantees from the business owner (pledges, collateral, surety), terms and conditions of payments.

Remember, in the end you will get exactly what is legally enshrined.

Summarize

To minimize the risk of losing money after investing in small and medium-sized businesses, you need to choose and check the company correctly:

1. Choose the industry you are good at

2. Select companies from your region

3. Invest in “fundamental” business areas with eternal markets

4. Meet the founder of the business

5. Make a legal due diligence of the company

6. Start with amounts that you don’t mind losing

7. Request business documentation and note what will be sent to you

8. Invest in something that has been working for a significant time

9. Observe the business for a while, do not invest immediately

10. View reviews of the business, product, and entrepreneur

11. Ask why you don’t take loans from banks

12. Ask for a company development plan

13. Pay attention to business openness

14. Analyze the client’s “shell” of the business and follow the “client’s path”

15. Ask a lawyer to check the agreement before concluding the transaction

Share, have you ever had to choose a company for investing money? What did you rely on when deciding to invest?

By the way, in our Telegram channel we write about real experience of our private investors: where to invest? how to check companies? how to legally formalize a deal? what guarantees can be obtained?

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Thank you for your attention and I will be glad to receive feedback on your investment experience!

Moris Akline
About author

Speculative operations in the foreign exchange and stock market. Work with futures and indices on CME. Work on FORTS and RTS. Development of portfolios and investment strategies for clients. Knowledge of technical (price charts of various types, indicators and oscillators, trends, channels, support / resistance levels) and fundamental analysis, take note of news. I work according to my trading strategy in compliance with the rules of capital management and risk management. Development of trust management strategies. Technique of order execution, placing and changing protective stop-losses, hedging.
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