A guide to small business investing

Greater numbers of public investors are "getting in on the ground floor" by investing in small businesses. When they are successful, these enterprises enhance the economy and provide jobs. They can also provide new investment opportunities, but that must be balanced against the inherently risky nature of small business investments. However, there are basic principles of small business investing that can help any potential investor, make the correct choice, for their investing. You should always remember to investigate before you invest. Here is a guide to small business investing-

• Never make a small business investment that you cannot afford to lose entirely-You should never use funds that might be needed for other purposes, such as college education, retirement, loan repayment, or medical expenses. Instead, you should only use money that you can afford to lose, without jeopardizing your lifestyle.
• Never let a salesperson or other financial professional convince you into investing-It is crucial that you do your own research to determine if this is the right investment for you.
• Never put "all of your eggs in one basket"-To decrease your risk you should consider investing smaller amounts,in several small businesses. Keep in mind that a few highly successful investments,can offset the unsuccessful ones.
• Never invest without reading all of the literature-Almost all public venture offerings make use of a disclosure document, or prospectus. This document may come in different forms and sizes, but it should disclose all factors that are crucial to the proper assessment of the offering. You should read it carefully and completely to find answers you need to make your decision about the investment. You should beware of information that is different,from that in the disclosure document or not contained in the disclosure document. Keep in mind that if it is significant, it must be in the disclosure document or the offering will be illegal.
• Never invest in a company where you are unsure of the management-Savvy investors understand that they are not just investing in ideas (products), but the people behind the products. It is a good idea to see management of the company face-to-face to size them up. You should focus on experience and track record,rather than a smooth sales presentation. If at all possible, take an experienced business person with you to help in your analysis.
• Never let your emotions drive your investing decisions-You should never believe that an investment is risk-free. It is important to understand that even the best venture offerings are highly risky. Keep in mind that if you have a nagging sense of doubt, there is probably a good reason for it. You should constantly remember that good investments are based on sound business criteria,and not emotions. Experienced investors advise that if you are not entirely comfortable, the best approach is usually not to invest. Keep in mind that there will be many other opportunities. Do not let anyone pressure you into making a premature decision.

As a beginning investor it is important to understand that there is no magic formula for making successful investment decisions. However, there are certain factors that are often considered particularly important by professional venture investors. Some of these are-

• How long has the company been in business? If it is a start up or has only a brief operating history, are you being asked to pay more than the shares are worth?
• You need to determine whether management is dealing unfairly with investors by taking salaries,or other benefits,that are too large in view of the company's stage of development,or by retaining an inordinate amount of the equity of the company compared with the amount investors will receive. Also you should consider how much experience does management have in the industry and in a small business? How successful were the managers in previous businesses?
• Do you know enough about the industry to be able to evaluate the company and make a wise investment?