Getting involved in start-up investing can be a very effective way to grow your money but it comes with a significant amount of risk. Although smart investors can usually break even once they’ve had some practice, actually making it into a career requires something extra. You need not only to be good at picking strong prospects, you need to identify the weaknesses of the companies you pick and develop solid plans for resolving them. You need to balance risk across your investments and work out how they can advantage one another. You also need to have a clear idea of your own abilities and be realistic about what you can and can’t deliver.
Start-ups aren’t listed on exchanges until they’re already well past the difficult initial stages of establishing themselves. By this time, if they have really strong prospects, investors are already chasing them, and the value of their stock can be sufficiently high as to deter new investors with limited funds. How can you get in there before this? If you do seek them out through exchanges, how can you identify the really hot prospects among literally thousands of others? You’ll find specific platforms dedicated to investments of this type and pitching events where you can hear from lots of local entrepreneurs at once. What most successful investors in this sector do, however, is to draw on their personal networks. When doing this, the vital thing to remember is never to let sentiment get in the way of good judgement.
How should you go about assessing the potential of a start-up? A strong USP is a must but many investors start by looking for a healthy balance sheet and a good supply of material assets, simply because this reduces the risk of disaster and increases the chance of successfully recovering money if the business fails. It’s important to be sure that the business not only has good ideas and a ready market but has what it takes to exploit this. No matter how many documents you’re offered, nothing beats interviewing the team itself to clarify this.
Hands-on or hands off?
How closely should you be involved with the companies you invest in? Start-ups are not like established businesses – they tend to be low on personnel, so they often have skills gaps, and they also tend to be run by younger people who have more energy but less experience. If you’re investing a significant amount of money then it’s reasonable to expect to have some input into how a business is run, and if you choose wisely then the benefit of your skills, experience and network will be gratefully received. Bear in mind, however, that time is money, and don’t invest too much of your time beyond the point where it likely to be profitable for you to do so.
If you set out to balance an investment portfolio then you’ll usually try to establish a mixture of high risk (but potentially more lucrative) and low risk (but not very high-yield) assets. With start-ups, however, everything is fairly high risk. Despite this, there are measures you can take to keep yourself safer overall, and smart investors do this. Although it makes sense to focus on areas where you have pre-existing expertise, spreading your investments across two or more sectors helps to protect you from economic changes. For similar reasons, you may consider investing in start-ups abroad.
A successful businesswoman who has invested in a wide range of start-ups, Lady Barbara Judge is living proof that it’s not necessary to limit oneself to one sector in order to do well. Although she has a focus on technology companies, she’s also taken an interest in property, homeware and fashion. Rather than simply being picky about where she puts her money and then letting events take their course, she is very much a hands-on player, usually sitting on the board of each business she gets involved with and sharing her famously impressive network of personal contacts as well as her expertise to help them achieve success.
Building a career in the start-up sector takes time and patience. As in other areas, you’re likely to have to work very hard to begin with, without big returns, and almost everybody incurs some losses along the way. Over time, however, you’ll get to see your surviving start-ups ripen, giving you more money to invest in the next generation. As long as you remain open to learning from your mistakes, your success rate will improve over time and you’ll never run short of interesting work.