Promise, potential profit and peril: researching start-up companies

Welcome to the September 2021 edition of our newsletter!  In this issue, we’ll examine the rewards, and the risks, when looking to invest in new companies and innovative, but potentially unproven, technology.

Reaching New Frontiers at Warp Speed: But What Lies Ahead?

Innovation abounds in today’s economy, as everything from non-bank digital payment services to on-demand delivery reshapes the ways in which consumers live. Young companies, some entirely new since the start of the pandemic, see opportunities to profit from what appears to be a lasting, fundamental change.  With the advent of direct listing and confidential initial public offerings and special-purpose acquisition vehicles, these companies can now also access public market capital more easily than ever before, the recipe for rapid growth is clearly spelled out.  But are the risks as clear?

In recent years, the leaders of startup companies have gained a higher media profile than any time in the last 20 years, thanks to the proliferation of SPACs and other means of quickly scaling up operations.  Some of this media glare has brought unwelcome attention from regulators and law enforcement — whether the accusation is of a biotechnology company misleading investors about its in-development products, or the founder of a software development company reportedly inflating revenues and altering internal documents to do so – necessitating greater scrutiny of companies and executives which are under increased pressure to outperform.

Fortunately for larger investors, due diligence can provide a measure of comfort, or caution, which can better inform investment decisions before they’re made.  With regard to emerging biotechnology companies, for example, one key indicator is to examine the backgrounds of not only the executive team and directors (if they have a board), but also outside advisors and retained experts, who are often more crucial to a startup’s success than within established companies.  How well do their credentials match what the company is actually trying to accomplish?  Are their backgrounds, as stated to the public, entirely accurate?  Have they had any past professional miscues or regulatory concerns?

By thoroughly researching a fledgling company and its extended orbit of leadership and advisors, your clients can better anticipate any concerns which lie ahead before making important investment decisions.