By Catherine Li
Actress Audrey Hepburn once said “to plant a garden is to believe in tomorrow”. Startups follow the same concept. In many ways, the willingness for individuals to begin the startup process—whether it be as founders, investors, or even team members—is a willingness to believe in the future. It's not so much a question of why we “need” to invest in startups, as it is why we should want to.
Driven by crazy ambition and insight—and even sometimes naivety—to charge into the unknown. Of course, mature organizations have innovative agendas, whether they involve significant research and development budgets or corporate innovation frameworks, but often miss the core DNA of these cultures. The fundamental alignment of the individual and the outcome means it's challenging to recreate the pressure-cooker of a startup in a larger organization, without that methodology integrated in its core business model.
Startups are our outside bets in the cycle of innovation where mistakes are made and breakthroughs are discovered in order to sustain the field of business. While their territory is high-risk, they can also yield exponential returns if executed the right way in comparison to other more traditional investment classes, including non-fiscal returns of investment like education, entertainment and impact. Unlike other investment classes, startups aren’t able to provide the level of comparable market data and forecasting as other investment propositions.
The Investment Approach
This affects the way that they are valued and the types of data points an investor would usually look at when making decisions. By default, investing into startups demands a different approach, to which Bill Gross’s “Ted Talk” provides a great foundational overview. Here a few things that may be important to consider:
- Gain a deep understanding of the driving factors to why that problem exists and why now is the time for a solution—not only of the problem that the startup is solving.
- Use whatever resources you have at your availability to gain exposure to quality deal flow
- Invest alongside others, both co-investment and group investment is a growing space for a reason.
- Always take a portfolio approach
- Understand the drivers to the startup’s growth and its customer acquisition. Don’t get fixated on financial forecasts.
For good reason, startups comprise a small part of their overall portfolio for most investors. However, investing in startups contain the most entertainment and social value. Such investments are the same ones we inform our friends and family about, and gain motivation and excitement from, more so than anything else in our portfolio. An important note for startups as well: You cannot over communicate with your investors. They will be there through thick and thin if engaged in the right way.
The Co-Investment Trend
Having more than doubled to 104 billion USD since 2012, co-investment is becoming an increasingly proven portfolio strategy. Non-traditional investor education through early stage startup and investment clubs have all seen seet investing become a team sport, with opportunity sharing and co-investment becoming as viable a strategy as ever. Currently, we see a spike in time-poor, cross-stakeholder leaders who are looking to better utilize their own network and unlock knowledge capital.
Investing investors along for every stage of the venture ideation and build, startups can tap into another method to quantify a venture’s success likelihood. This validation aids investors to move forward with certainty, with an evolved level of due diligence that they have been a part of conducting. It’s an opportunity to take startup investors along for the journey, through ups and downs, and beyond financial reports. Investors today are also thought leaders in the spaces where they operate, so being on the front line makes sense.
Investing in startups that understand this will lead to more successful investment overall. Such investments are also opportunities to invest in projects that align with a desired impact. This can allow investors to steer a burgeoning industry of interest (for example, virtual reality) by contributing capital to the parts they support. It’s an opportunity that calls shots on that industry’s potential and future.
The same cycle of life in nature occurs in business—propagation, growth, maturity, decay, and replenishment. Every industry in every country is experiencing an exponentially accelerating rate of change driven by technology, connectivity, and environment. Whether our motivation to invest in startups is responding to increased market pressure of seizing opportunities, we have little choice but to bet on our own future. Let’s make ours count.
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