When Investors Invest in Ideas and Not People
This article is written by Brian Malika, a Contributor Author at Startup Istanbul.
Ed Roberto is the Vice president for the Middle East and Africa Techstars. TechStars is a venture capital outfit that invests in cutting edge digital technologies.
When it comes to investing in new business ideas or towards enabling an already running small start-up to scale up to new market dynamics the final decision maker who approves the cheque has to be extra careful. This means that investors have to ensure all the success determinants of the business idea or start-up being considered for funding meets the maximum threshold satisfaction.
Some of the questions that traverse the investors’ mind before making the final decision go as following :
Will the market reciprocate this new product or service?
Do the entrepreneurs involved have what it takes to run such a business scale up project?
What if the new business idea doesn’t work out on the full scale as planned?
Well, any individual, partners or big companies out there that when it comes to investing your money, mentorship and emotional expectations in a business idea then you have to face the reality that there are higher chances of that particular business pursuit to fail than to succeed!
All research reports cement the notion that more start-ups are failing to reach their desired destination. And a very few are succeeding. The Harvard Business School reported that says 70-75 percent of funded start-ups die after their first birthdays.
You can imagine that after all the handwork all entrepreneurs put in to convince investors for a partnership deal only a few entrepreneurs get lucky and that the death rate for such funded start-ups stands at 70-75 percent after the fifth birthday?
Please note that the above statement is not meant to scare any investors reading this to shy away from believing in the idea of start-up funding, but rather it's setting a basement for strategic and meaningful investment plans within the start-up ecosystem as you will discover as you continue to read through this article.
So with all the volatility being reported within the start-up ecosystem what's the trick to get it right?
I bet all investors right now are thinking hard on how to spot the right start-ups so that they can invest in them. And true, many investors already are trying their level to get the right start-up on board for partnership engagement.
Or rather, some investors are reducing the package they usually would have allocated for investing in start-ups in the hope of mitigating on risks for making losses.
But are the above two strategies sustainable as we head into the future of investing professionally? The answer is simply ‘NO’.
But don’t stress yourself so much on how to survive the volatility within the start-up ecosystem in regards to achieving success because I have done the homework this time around.
So based on expert advice from leading investors that have been in the game for a good amount of time, it is advised that when considering to invest within the start-up ecosystem, first of all, you must follow the following three rules of engagement as highlighted below :
Engagement Rule 1: Work with polished start-ups or rather polish them yourself.
Here, you shouldn’t just be easily convinced to write a cheque to any Tom, Dick, and Harry out there who have a great idea .
Listen even if the business idea that your being presented with is great, there is no way it will implement itself! Successful businesses are executed successfully.
Therefore, try your level best to strictly sigh a partnership deal as an investor to entrepreneurs that merits with the personal skills and professional ones for that matter to execute the amazing idea at hand.
If you encounter entrepreneurs that have amazing business ideas but they lack the professional and personal profile to execute the same then it would be strategic for you as an investor to make an executive decision and suggest that is in of engagement order for such entrepreneurs to pass through some sort of training that would be continuous even after the investment fund has been awarded so that they can be in better poitiLastyon to implement their business idea.
Otherwise, attending business summits like the start-up Istanbul Turkey and working with organizers of accelerator programs could definitely be an ideal platform to meet start-up founders that have been polished to better implement their business ideas.
Engagement Rule 2 : Try Your Best To work with start-ups that swim in your waters :
As an investor, cease from the popular investment notion of investing in business ventures that have high returns on investment and embrace the thought of investing in start-ups that solve social problems within fields that you're passionate about.
For instance, if you are an investor that is passionate about clean water in your private life then it would be prudent to consider working with business ideas that propel ventures that make it easier for the target market to access clean water .
Do not be quick to towards making investment commitments on business opportunities that you do not like or know nothing about their concept but you just can’t resist the immense return of investment being promised. This is because once you sign such an investment commitment with a business venture that you don’t like or not know very well and then an important investment decision needs to be made in future so that the execution of the idea you already funded sails well , chances are that you as an investor might receive advice from many people which could just turn out to be a mess.
But if you are passionate about a business idea and well knowledgable about it at the same time, then chances are that if in future you will be required to make a critical decision as an investor then you are most likely to make it right.
That being said you can always learn new business ideas and fall in love with them. So don’t limit yourself to one business idea.
Engagement Rule 3: Invest In Many Start-ups as possible
Lets say you have plans of investing 1 million Dollars in start-ups for a certain period of time . And you go ahead to put all that million dollar cheque to one start-up that has a mind blowing business idea! That would be a very big mistake if you can do so .
This is because you will simply be putting your eggs in one basket and the chances of being a failed investor will be as equal to the chances of a successful investor . This is not a good expectation to ride on as an investor .
Instead, it would be strategic to invest all that 1 million dollar cheque in like ten start-ups that have killer blowing ideas in the same field of business interest. By doing so you will have reduced the chances of failure as an investor with a very big margin .
Very high chances are that if you invest in multiple start-ups that are working on different models to solve the same social problem then you are very likely to emerge with at least one successful business project that you can further invest.W
Lastly, do not allocate an investment fund that would cripple you as an investor if things don’t work out well . That is not professional investing .
Professional investing is all about allocating an investment fund to a start-up. And if things don’t work out well with the start-ups you are working with, still, your life as an investor won’t feel a thing.
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