What a venture investor needs to remember
The Business Angel Principle
Andrey Movchan, Forbes.ru
There is a law – both biology and economics: businesses are born to grow quickly, achieve success, grow old and die. According to this law, investments in young businesses should be the most profitable. They were born recently, create new products, work on new technologies. The younger the project, the more profitable it is.
Investments in newborn businesses are usually called venture capital, and investors in such businesses are called angels. The law works – angel investments sometimes give the highest income and create global leaders: Google and Apple, DHL and Starbucks. But still the success rate is low. Not all venture funds are successful: if you look at 75% of the worst, their results, to put it mildly, are not impressive.
Venture investment is based on finding a small number of super-successful projects and a large number of failures. There are many reasons for failures, most of them are related to a person's tendency to omit details: after seeing a beautiful idea, he already considers it implemented. But it's not enough for an idea to be right – it needs to be commercially profitable, and to turn an idea into a business, you need not a genius scientist, but a cynical manager and businessman.
What should an angel understand in order for investments to eventually bring him a substantial income? First of all, in the venture business, you will have to forget about the usual rules of investing in developed companies.
For example, an angel should not think about evaluating a business. The business at the start cannot be evaluated at all: the uncertainty is too great. And it is better to invest a little more in it (there is less risk that there will not be enough money, and the bar will be higher for the next placements) – if successful, the income will still be incomparable with the costs.
You can not be too greedy and agreeing on a share in the project. This can deprive an entrepreneur of motivation. In this case, as a rule, a piece of the pie increases, but the pie itself decreases significantly (if not to zero): the entrepreneur loses interest in the business.
An angel should not analyze a business idea. Startups tend to focus on new products or technologies, within which expert opinions may be erroneous.
It is necessary to analyze the personality of the entrepreneur and the team and make sure that they really believe in success. It is customary, for example, to be guided by the rule Put your money where your mouth is ("Back up your words with money"), according to which an entrepreneur who believes in success invests his own money in a startup. However, such a method can be counterproductive. An entrepreneur sometimes refuses to invest in his own project, not because he does not believe in it, but because he does not have the funds for such risky investments.
An even more exotic method is practiced by a number of American angel groups: they require entrepreneurs to pay for the right to submit their project. This, in their opinion, weeds out those who are not sure of the success of the presentation. However, this method most likely weeds out the prouder and more confident that they will find investments without the humiliating "admission fee".
A common way is an agreement on a "floating" share: an angel receives for his investments not a fixed percentage of the company, but a share determined by the results of several years and bringing him at least a guaranteed income.
A good angel should understand that if he can only give money to a business, it is better not to invest in such a business. Real angels help with additional business, lobbying, technology provision, dissemination of positive information and many other ways, including strategic advice and, as unpleasant as it sounds, strict control and criticism at the board level.
But understanding the above does not guarantee anything. Venture is an extreme sport where a very high reward awaits the few best.
Portal "Eternal youth" http://vechnayamolodost.ru14.02.2011