what to know when investing 100k ?

**adkot** · 11-28-2007 03:48 PM

Hello Everyone,

I currently have an opportunity to invest in the gaming industry with a person who is doing what I am doing but at a much higher volume (therefore better returns).

We've been in discussion for about a month and that company would like for me to invest 100k with them in additional inventory. This will supposedly generate a 5% monthly return.

Some moments, this sounds too good to be true, but then I hear of people making upwards of 20% on successful business ventures.

Without going into specifics about this opportunity, I just wanted to know what I should expect when investing. The only investment opportunity I've knowingly experienced is Real Estate.

So the question is, what should I expect to know/see before I give up a bunch of money to someone else's business venture? I know about the business plan, and that's about it. It looks good on paper. But otherwise, I don't know what I should be looking for or the questions to ask.

The company has invited me to fly out and meet them in person, but I want to be a little more knowledgable before I spend any money at all.

Just to let you know, I am willing to risk the money. But if it was yours, what would you want/need to know before you signed anything?

Thank you in advance,
Simon
(current king of the arcade)

**Cole Taylor** · 11-28-2007 04:16 PM

wow, you've gone from wanting to start an online retail business of out your apartment to investing 100k in someone elses business and not minding if you lose it all: bravo.

Anyway, you were probably told at one time that if it sounds too good to be true it generally is. Five percent a month is not realistic considering someone could get financing elsewhere, for much less, considering it is backed by inventory.

The fact that they cant tells you something is wrong. Whether that something is their credit rating, poor use of proceeds, unrealistic projections, etc. remains to be seen.

Also, if they are doing what you're doing wouldnt that make them competition? Why would you invest in the competition before your own business?

This thread doesnt make a lot of sense. It would make more sense if you just came out and said that you needed investors and asked what would investors expect in return, at what rate, so on and so forth.

**jasaunders** · 11-28-2007 04:40 PM

But while we are on the topic, I am looking for investors in my gaming related business. If you truly do have money and are serious about investing it, and are interested in gaming, feel free to contact me and we can talk further.

**adkot** · 11-28-2007 05:13 PM

Well hey, I do have lots going on.

Let's just stick to the question...

Cole Taylor, I will phrase it as follows to maybe get the answers I'm looking for:

I need $100K. What do you need to have/know from me before you'll give me your money?

Starting online retail in my apartment was my first step in learning the retail side of things. I now have 2 retail stores (slowly growing ebay accounts) and am working on a B&M. I've been involved with lots of money in lots of things, especially real estate. But I've just never invested in someone else's business venture before.

And there are tons of reasons I would invest in "competition". Especially if I have moved on to a different market.

Thank you,

**adkot** · 11-28-2007 05:16 PM

To Josh and others:

Before I directly reply to your opportunities, the point of my thread is to learn what it takes to intelligently invest before I do so. Once I know how to do that, I will consider what you have to offer.

Thank you,

**jasaunders** · 11-28-2007 06:02 PM

Ultimately, as basic as it sounds, what you need to weigh is the risk vs. the return. This also includes opportunity cost. If you invest your $100k in this business and make a 5% return, could you have invested that money somewhere else and made a larger return.

Then add risk into it. If you could invest $100k and make a 5% return, but the risk is 50% of being successful. Or you could invest $100k and make a 4% return, but the risk is 95% of being successful. Which are you going to choose? The latter.

It is obviously much more complicated than this as to what you need to look for, but I have to get running now, I'll try to post some more info later.

**Cole Taylor** · 11-28-2007 07:13 PM

What Jsaunders is getting at is the inverse relationship that exists between risk and reward. Every opportunity is judged based on similar opportunities of equal or lessor risk, thier given return, and thier probablity of success. As such, your returns need to be inline with comperable opportunities if you want to even be considered.

How do investors guage risk? Well, there are various methods including complex financial models, however, you'll find that initially it's basically heuristics or best guess.

Essentially you want to show investors that you've done your homework and what you propose is more than an idea. You want to show a viable, scalable business model.

If I'm going to invest my money with you, I'm going to look at your marketing plan to see if it contains marketing research provided by an outside party. I'm not going to believe what you tell me. I'm looking to make an educated guess as to whether or not there really is a need for your product or service; to do that I need data! If you're selling gaming consoles I want to see the results of your focus groups. Convince me you've done your homework.

I want to see a detailed operating plan and budgets. I want to know who is doing what, when, and how much it's going to cost.

I want to see that your management team has industry experience and this is not your first venture.

I want to see that im getting fairly compensated for the risks I'm taking and believe me you better have your own money tied up in this...

- typed on my cell so forgive any errors-

**BusinessAdviser** · 11-28-2007 07:24 PM

And I'll add to this. When Cole discusses the management team and its relevant experience, don't get confused thinking that this is just a small detail low in the list. When you make an investment, you're actually investing in two main things: a project and a person. The best project in the world managed by an incompetent fool will fail, just like a great manager trying to make a real flop work. You need to do your homework on this company as much as on this project. Get resumes, speak with them, get references and CALL those references (or email, I suppose). Just don't forget this element, which is just as important, if not more important, than the project itself.

Originally Posted by Cole Taylor

What Jsaunders is getting at is the inverse relationship that exists between risk and reward. Every opportunity is judged based on similar opportunities of equal or lessor risk, thier given return, and thier probablity of success. As such, your returns need to be inline with comperable opportunities if you want to even be considered.

How do investors guage risk? Well, there are various methods including complex financial models, however, you'll find that initially it's basically heuristics or best guess.

Essentially you want to show investors that you've done your homework and what you propose is more than an idea. You want to show a viable, scalable business model.

If I'm going to invest my money with you, I'm going to look at your marketing plan to see if it contains marketing research provided by an outside party. I'm not going to believe what you tell me. I'm looking to make an educated guess as to whether or not there really is a need for your product or service; to do that I need data! If you're selling gaming consoles I want to see the results of your focus groups. Convince me you've done your homework.

I want to see a detailed operating plan and budgets. I want to know who is doing what, when, and how much it's going to cost.

I want to see that your management team has industry experience and this is not your first venture.

I want to see that im getting fairly compensated for the risks I'm taking and believe me you better have your own money tied up in this...

- typed on my cell so forgive any errors-

**akula** · 11-28-2007 07:42 PM

Originally Posted by adkot

Just to let you know, I am willing to risk the money. But if it was yours, what would you want/need to know before you signed anything?

okey dokey...
so, your question is basically "what is best practice for venture capital"? this list of items is very long and complicated but can be summed up as:

1) portfolio fit: can you afford to lose this 100k? do you have experience with businesses like this? would you enjoy being a part owner in this venture? would you take a job with this company if that was needed? How can you add value to this company? And if you can't add value, why are these guys asking for your money and not a more suitable person's money? And if they don't care where they get the money, are you being adversely selected against?

2) diligence checklist: when buying equity, the company has to pass a checklist of due diligence criteria (40 odd items). Does the company pass this checklist (e.g. is there a stellar management team who have the connections to build and sell the business etc)?

3) Inside information: what do you know about the company that lowers the uncertainty of your return (e.g. does the company have a new contract coming up with a big client?)

4) Transaction structure: who else is investing? are there coinvestors? where will the company get additional finance if it becomes sucessful? what are the terms of the transaction? what about convertible debt versus equity? what about dilution rights? positive covenants? negative covenants? right of first refusal?

These are the four things you'd look at if you were seriously considering investing in private equity

Overall: as you can see, it's very hard and expensive to invest in private companies. there's a lot of things that need to happen for an investment to work out. that's why, angel investors invest in groups called syndicates. be smart, don't be a retard, join a syndicate and invest through a syndicate

**dreamer4ever** · 11-28-2007 10:29 PM

I say invest in the marketing within the games. That is truly something that is going to be big and already has started to become huge. For example having your game character sell coke within the game. Coke will pay you money for every coke is sold or just a lump sum.

**jasaunders** · 11-29-2007 07:42 AM

To give you an idea, I am presenting to private investors, which may be more suitable for your needs compared to what VC's look for. Ideally, you would want to look for the same things as a VC, but their experience and knowledge will vastly outweigh yours, so maybe it isn't practical.

So here is what I have prepared in meetings with potential investors.
1. Presentation (the most important)
2. Business plan outlining everything from marketing strategy to operations plans to how the board of directors is structured to resumes to appendices showing graphically how my business will work.
3. 12 Month Sales Forecast with a breakdown of how the sales figures were derived
4. 12 Month Conservative Budget Forecast
5. 12 Month Optimistic Budget Forecast
6. Break-even analysis
7. Five year projections
8. Beginning cashflow statement
9. Breakdown of startup costs
10. Pricing model

As Daniel said, it may be in your best interest to join an Angel group, but not if you are only looking to invest one or a couple times. From what I have seen, most groups have minimum requirements such as how much you must invest in a given year, and a lot of groups are private and by invitation only.

**adkot** · 11-29-2007 12:42 PM

Very cool and very helpful. Thanks guys.

Well, for my current opportunity with gaming, I barely have half the answers that is suggested I have. It seems I should have a lot more.

I mean, I don't guess I should have to ask for this stuff right? Or do I need to dig for it myself? It seems they should be pretty upfront with quite a bit of info when asking for my money.

I will also learn about this syndacite stuff and see what that is all about. But before I go "big time", I may want to try my luck at being a private investor for a bit.

Again, thanks everyone. As time moves on, I'll let you know what happens.

Simon

**adkot** · 12-01-2007 08:11 AM

Originally Posted by dreamer4ever

I say invest in the marketing within the games. That is truly something that is going to be big and already has started to become huge. For example having your game character sell coke within the game. Coke will pay you money for every coke is sold or just a lump sum.

This is a very interesting point which I have discussed with some people in the industry. It seems that larger corporations (such as Coca Cola) actually are spending money on "in-game" advertising. Probably been doing it for years and years. I don't know how much or many details about it, but there is another group actively trying to develop games specifically for advertising.

I wish I knew more about this, but from what I've learned, its not that easy to spotlight a product in-game and make it seem worth enough to a company to fund it.

**jasaunders** · 12-01-2007 10:26 AM

Originally Posted by adkot

I wish I knew more about this, but from what I've learned, its not that easy to spotlight a product in-game and make it seem worth enough to a company to fund it.

Where are you getting this information from? It is relatively easy to put product placements in games. Many large companies are already onboard. In fact, it better be easy as this is the basis of my new startup.

As far as your comment of the company being upfront with information, this is not necessarily true. You may have to ask for information. But when you do ask, you should get it quickly, with no resistance and the information should be accurate. If you ask for records of their past 12 months of sales and they tell you they don't have it or can't give it to you, a flag should be going up right away to stay away from these guys.

**adkot** · 12-01-2007 11:31 AM

Originally Posted by jasaunders

Where are you getting this information from? It is relatively easy to put product placements in games. Many large companies are already onboard. In fact, it better be easy as this is the basis of my new startup.

As far as your comment of the company being upfront with information, this is not necessarily true. You may have to ask for information. But when you do ask, you should get it quickly, with no resistance and the information should be accurate. If you ask for records of their past 12 months of sales and they tell you they don't have it or can't give it to you, a flag should be going up right away to stay away from these guys.

Well, more specifically it is the RPG (sci-fi or fantasy) genre of video games I am talking about. You come up with a great game with a proper story and mechanics, then you worry about product placement. The game must sell before advertisers will give you any money.

I'm guessing that sports games and or other pop culture games would be easier to do. But I'm not very interested in those. But good luck to you Josh. I'm sure I'll be asking more about it here soon.

But as far as past 12 months of sales... what would be something similar to look at if it is a startup? The only history is the successful startup of several businesses before this one. I have asked for info on those previous businesses and only got general figures and references. I figured that was ok since this group is no longer a part of those companies.