| 10 Recommendations For Aspiring New Venture Investors Posted: 06 Jun 2022 07:05 AM PDT  Investing in entrepreneurs and startups is a fun but different world from investing in conventional stocks, bonds, and commodities. First of all, it's more of an investment in people than in a business, since the startup is usually an idea barely half-baked when they need your money. Secondly, the risk is very high, since as many as 90 percent of startups fail within a few years.
On the plus side, it's an opportunity to get in early and really help make things happen that will change an industry, or change the world. It's an opportunity for that "big bang" return of 10X to 100 times your initial investment, like early investors in Google, Microsoft, and Apple. Finally, it's an opportunity to "give back" what you have learned in your own career for the next generation. Today most startup investors still register with the SEC as "accredited" investors before they buy any startup equity in the U.S. This requires a simple signature that you have a net worth of at least $1M or have made at least $200K each year for the last two years. These requirements for equity investing have been relaxed only a bit, with caveats, with relevant crowdfunding changes. With all these considerations, I recommend the following steps and strategies for any investors newly interested in startups: Build a balanced investment portfolio. Just like a seasoned stock investor would never put all his investible resources into a single stock, don't put all your money into startups. Begin with perhaps 5-10 percent of your total investment base, and be prepared to lose it all. The growth target should be 5-10 times your initial investment in five years. Start in a business domain you know well. Since there are no bellwethers like Apple or IBM in the startup arena, your best bet is to pick one in a business area you know well. Don't be fooled by thinking that dating sites are hot, so you should invest in the next startup you see in that realm. Remember that 9 out of 10 startups fail in every realm. Fund an entrepreneur you know and trust. In the business, this is called investing at the first tier for startups - "Friends, Family, and Fools (FFF)." Most entrepreneurs start asking for money from this tier, when they have very little more than an idea. Here you are definitely betting on the person, rather than the idea, but the upside potential is huge. Join an existing angel investor group. This is the second tier of startup investors, and offers the comfort of working with more experienced investors with similar interests, to help gather and vet startup investment proposals. Some of these groups also offer you the option of putting your money into a multiple-startup fund to spread your risk. Diversify your total investment across several startups. Angel investment amounts per startup per investor usually range from $25K to $250K. These may be aggregated by an angel group up to about $1M for an angel round. If a startup needs more than this in a single round, they should talk to venture capitalists, who invest institutional money rather than their own personal money. Use the surge of crowdfunding sites for small amounts. The hottest new way of investing in startups to go to popular online sites like Kickstarter and IndieGoGo. There you can get in for as little as $20, or even less. Typically these are used only for non-equity rewards or pre-orders, but the crowdfunding implementation does allow equity investments with many restrictions. Participate as a mentor in local startup incubators. Incubators are a great place to learn about potentially great startups, and participating as a mentor helps you learn which ones are a good fit for you. The best known ones, like YCombinator, started by Paul Graham in Silicon Valley, and TechStars, located in Boston, provide excellent networking to investors, and on-site technical leadership, which can make your investment less risky. Do your homework before investing. Public companies with stock usually have industry analysts and SEC filings to give investors a quick view of the company stock value. Startups are private companies with no common document filing requirements. Thus it is incumbent on every potential startup investor to ask for and read their business plans, current financial statements, and investor presentations. Invest locally and take an active role. Most angel investors only invest in companies and people local to their geography. Skip international and other opportunities you can't touch and feel. Many negotiate a board seat for themselves as part of the investment term sheet. This allows them to ask for and get regular updates from the company, and allows them to have a say on how their money is used. Think long-term. It's a lot easier to buy stock in a startup than it is to sell it. Once invested, you should expect no return until the first "liquidity" event in 3-5 years, maybe longer. Liquidity events include merger or acquisition (M&A), or Initial Public Offering (IPO) when the stock goes public. There is no "startup stock exchange," so you can't sell the stock at will.
In summary, investing in startups can be very rewarding, both financially, and in your ability to really help someone who needs help. But it's always a risky proposition, probably well beyond the risk of the commodities market, since there are so many unknowns and few controls. My advice to new startup investors is to start slowly, stick to business areas that you know well, and put more weight on your assessment of the entrepreneur and the team, than on the idea. Successful startups are all about the execution. You don't want to end up on the wrong side of that equation, but you do want a bite of the next Apple. Marty Zwilling |
| 5 Keys to Developing Trust and Leadership In A Crisis Posted: 05 Jun 2022 07:05 AM PDT  Every business leader expects to encounter one or more crises eventually. The challenge for each of you is to get it handled quickly and effectively, without losing the trust of constituents, as well as customers. In my role as business advisor, I see leaders who handle it well instinctively, and others who fall apart under the stress, or let their emotions and biases lead them astray.
In my experience, there are only a few basics to remember and practice. I saw these summarized clearly in a new book, "BUILD," by a well-known entrepreneur and technologist from Silicon Valley, Tony Fadell. He assures us that these apply to an external crisis that you have no control over, or an internal screwup, or just the kinds of growing pains that hit every company: Keep your focus on how to fix the problem. Forget about assigning blame until later, since that will only complicate matters and make it an emotional battle. What is needed first is your strong leadership, or even a leadership team, to build a plan, assign the right people, and monitor the steps to resolution. Provide tools and resources as required. Especially when distractions and emotions are high, it will help your focus to break down large challenges and crises into smaller elements to get things started and give you a sense of progress along the way. Map out some dedicated time for every serious issue. Don't hesitate to micro-manage initially in a crisis. Your people need to know who to follow, what to do, and how to do it. However, very quickly after everyone has their assignment as is actively working, you need to let them do their jobs without questioning every step. Micro-management at a later stage only increases stress and slows progress. I have found that micro-management can be especially productive if you are working with a first-time or unique situation, or working with a new team with little experience. The challenge for many bosses is to recognize when their team should be coaching them. Get advice before jumping to conclusions. Don't try to solve the problem or build a plan alone, especially if you have no relevant experience. Look for a mentor, or expert in this area, and ask their advice. You need to understand potential misconceptions, and ferret out any rumors which complicate the situation and lead to the wrong conclusion. Primarily for these reasons, I always recommend that new entrepreneurs and startups assemble a qualified Advisory Board or Board of Directors early in their lifecycle. The passion of a new CEO, in conjunction with crisis inexperience, often leads them astray. Over-communicate and really listen to feedback. When you sense a crisis, you need to communicate and listen carefully with urgency, transparency, and empathy. A tone of urgency encourages people to mitigate impact, and transparency builds trust in you as a leader. Showing empathy fosters resilience in facing the challenges directly and acting. A key challenge with communication in a crisis is to get ahead of the issue. Don't wait until a media inquiry or a government agency puts you on the defensive, and makes all of your efforts look like too little, too late. Daily updates on a crisis are often appropriate. Always be prepared to accept responsibility. It doesn't matter if the impending crisis was caused by your mistake, or your team, or was a fluke accident, you win trust by accepting responsibility for how it has affected customers and apologize. Conversely, the quickest and surest way to lose all trust is by blaming others entirely for the situation. Some business leaders I know have used their "original intent" as a way of defending themselves, shying away from accountability or admitting fault. Unfortunately, good intentions won't get you very far in a crisis where people may have been wronged.
If you as a business leader can weather one or two crises, using these recommendations, you will find your brand image and personal image rising, as well as your satisfaction with the role increasing. Prepare now to make your next crisis a leadership event, rather than a loss of trust event, for all to see. Marty Zwilling *** First published on Inc.com on 5/22/2022 *** |
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