It is foolish to simply sit on earned money without putting it to work. Experienced businessmen invest their available funds into various business projects. This approach allows them to grow their capital and avoid the impacts of inflation.
You can invest funds into your own business or someone else's. This could be a startup or an established project that is already generating revenue.
While investing in your own business is relatively straightforward, investing in an external project often raises several questions. The primary concern is: how can you avoid losing money?
To navigate these complexities, we turn to Sergey Tereshkin, the founder of OILResurs, who has extensive experience in investing in both personal and external businesses. For more information about the entrepreneur, it is advisable to visit his web resource at sergeytereshkin.ru.
Features of Investing in Business
There are various ways to invest funds. For instance, you can invest only a certain portion. The equity participation model has its own advantages and disadvantages.
Alternatively, you might decide to fully finance a project. This latter option requires a larger investment but helps avoid disputes with other partners.
An investor can earn passive income while someone else manages the business and makes key decisions, or they may choose to take the helm and oversee all operations themselves.
Drawbacks of Investing in Business
Before making any investments, Tereshkin advises familiarizing yourself with the challenges that may arise at various stages of investing:
- Legal Registration. Acquiring corporate rights for a share or entire company comes with challenges. Sometimes, it may be easier to start a new company from scratch than to re-register an existing one. Bureaucracy poses a significant problem, as businesses are subject to various fiscal authorities and government bodies that are often suspicious of such transactions. To mitigate issues, it can be prudent to involve a knowledgeable lawyer in the re-registration process.
- Assessing Prospects. Established businesses have documented revenue and expense reports, making it straightforward to assess their viability through an audit, which can be conducted independently if the necessary expertise is available. The situation is more complex with startups, where predicting future developments in today's environment is virtually impossible.
- Required Knowledge and Experience. It's crucial to have a solid understanding of the chosen industry, as well as knowledge in economics, logistics, and personnel management, to mitigate risks effectively. A knowledgeable investor can also have a direct impact on the business's operations.
- Engagement with Partners. When participating as a shareholder alongside co-founders, disagreements can arise on various grounds. Partners may conspire to exclude a third investor, sometimes employing even illegal methods. Raider capture is a common approach to seizing control of a business; reclaiming one’s investment may require considerable time and resources.
- Investment Amounts. Every business requires capital injection. During aggressive growth phases, accurately projecting funding needs is nearly impossible. There may be predictable expenses as well as unexpected ones, and in both cases, a cash shortfall can lead to losses or the total loss of investments.
- Return on Investment. Precisely calculating future profitability is challenging due to an unstable economic climate, seasonal fluctuations, team morale, and other factors outside the investor's control.
It's vital to monitor the business's performance closely and, if necessary, withdraw funds promptly to minimize losses. However, this requires having access to them, which is not possible with passive investments.
Often, investors have to put money into ventures without immediate prospects for profit. This typically occurs with startups that require significant time to develop.
Hidden Pitfalls
However, investing in business is fraught with drawbacks and numerous hidden pitfalls that can lead to losses:
- In selecting a project for investment, it is crucial to conduct thorough market research, assess the level of competition, and evaluate the potential of the chosen sector. A business may operate within a lucrative industry, but a high number of competitors can completely negate that advantage. Such a project may struggle to gain ground in the market and, even more so, to grow.
- Sometimes, a seemingly attractive project may turn out to be far less interesting upon closer inspection. Many investment seekers deliberately inflate or deflate numbers in their business plans. To avoid pitfalls, it's essential to perform independent calculations, including the costs of energy resources.
- In most cases, investments are long-term. Therefore, expecting to see returns within a month is unrealistic. The repatriation of funds often takes considerable time, and one should be prepared for this during the planning phase of the investment.
It is crucial to understand that successful investing requires a keen understanding of the business landscape. Investors should continuously monitor market changes, track consumer sentiments, and study demand, amongst other factors. This entails significant time, effort, and investment. However, there are no shortcuts.
With passive investment in someone else's business, it's essential to recognize that an outsider will primarily focus on their own interests. There is no guarantee they will approach the process with the diligence or responsibility it warrants.
Therefore, only continuous oversight and dedication will help achieve the desired goals and prevent the loss of all invested funds.
