5 Things to Consider Before Investing in An E-Commerce Startup

Although the future of the economy remains murky, there may not be a better time than right now to invest in a new company. The capital you can provide is that much more valuable to your entrepreneurial partners, and you’ll have a lot of weight to throw around in the startup space. The best startup venture you might want to consider investing in is an e-commerce business. The numbers bear this out pretty easily. On Cyber Monday last year, the huge online shopping day that follows Black Friday, consumers spent close to $1.5 billion dollars online. Customers are perfectly comfortable searching for products and services they desire online, and in fact many brands find their consumer base primarily through internet efforts. If you have capital to invest you’ll find no shortage of options. But first consider these five things before investing in an e-commerce startup.

First of all, what do you know about that startup’s market? Just as with stocks, you’re always better off investing in an industry that you understand. While any company’s plan can look good on paper, if their industry is completely new to you you’ll have difficulty vetting their projections. There are e-commerce startups looking to get involved in pretty much every industry, so stick with what you know to give yourself the greatest chance of a solid return on your investment.

The business plan may sound fantastic, but it will live or die on the strength of those executing it. So make sure you look into the track record of the company’s principals. A company can have a great product, but it’s true value is its people. This always the case, but especially when you’re dealing with a startup. There should be people at the company that truly understand the market they are entering, and ideally have long and successful track records with more established brands. Look into their past performance, and make sure this startup isn’t some sort of hail mary pass trying to resuscitate a dying career.

Next on your list should be gaining a clear understanding of how this e-commerce startup plans to monetize. Most investors don’t get into the startup game for a quick in and out. Your goal should be creating a partnership, and reaping the benefit of the startup’s long term growth and development. Do the owners have a plan for this? Make sure they have a strategy that will see the company earning money fairly quickly, which in turn will allow them to scale up and make you more money back on your investment.

You also need to be able to vet their budgeting strategy. Say you end up giving this startup a significant chunk of money. Will they know how to put it to work effectively? Too many startups to mention managed to grab a piece of capital only to squander it away with mismanagement, and end up closing up shop. The team behind the startup should have several years of projections in hand, without any smoke and mirrors. If they are clear how your money will be used, you’ll be able to rest easy with a better expectation of success.

Finally, make sure you have the opportunity to look over their legal documents from top to bottom. No business, whether a simple set of shopping cart solutions from BigCommerce or an entirely original series of app releases, should be approaching investors with all of their legal bases covered. That means a subscription and investor agreement, the formulation of an LLC or other corporate body and a sheet of terms. This will only be the start, and the documents could be rather dense. Have an attorney on your side to help you understand all of these materials. After all, these documents will be the final word on the percentage of ownership you’ll receive for your investment.