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Tips for prospective startup investors

Despite ongoing financial problems, Michigan's economy has been reinvigorated by entrepreneurs and dynamic new businesses. Most of these startups require significant funding to get off the ground, causing their founders to reach out to friends, families or area investors for support. It can be tempting to contribute heavily; the last decade alone has seen small startups like Facebook, Twitter and Groupon explode into hugely profitable companies. However, it is important to remember that for every Facebook, there are thousands of startups that utterly fail.

The United States Small Business Administration estimates that Americans found approximately 500,000 businesses each year. Knowing that most of these companies will ultimately fail, investors must act strategically and with great care to ensure their investments are rewarded with a noteworthy return. Even then, many businesses take years to return a profit, making it difficult to predict whether a given company will remain financially secure.

Before committing any money to a fledgling business, one should be sure he or she understands the way the company has been structured. For instance, one who invests in a limited liability corporation will typically not be held responsible for any losses that entity incurs. Without this protection, investors could be subject to collection efforts from stakeholders in the event the business fails.

Michigan residents without business connections or a known history of investment should be wary of any potential investment deals. Many entrepreneurs look for funding wherever they can, asking friends and family when wealthier investors have declined. This is not a reason to turn down every investment opportunity that comes one's way, but rather serves as an indication that further research and consideration is needed before making a decision.

Entrepreneurs clearly face considerable challenges in trying to turn their ideas into profitable businesses. Those who consult with financial advisors, business attorneys and other experts, however, can effectively limit their risk and maximize chances of success.

Source: Fox Business, "5 Things to Know Before Investing in Business Startups" Craig Guillot, Oct. 14, 2013

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