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Do you need to be experienced in business to invest in startups?
The rise of crowdfunding has made startup investment more accessible than ever.
It is also perhaps more appealing to the general public than in previous decades, with increased TV coverage of the startup game. Entrepreneurialism is an exciting movement which many want to be a part of.
The number of startups to invest in is also growing. According to the think-tank ‘the Centre for Entrepreneurs’, there were 660,000 new businesses created in Britain in 2016 – up from 608,000 the previous year.
While the stats for 2017 are yet to be published, figures from the tech sector at least suggest last year was another bumper period for new starts - data from Companies House, analysed by accounting group BSM, shows there were 10,016 software firms founded, a rise of almost 60 per cent on 2016.
Behind many such firms will be the vital support of investors – not all of which will be seasoned business experts.
Research by the US startup resource Fundable suggests as many as 38 percent of entrepreneurs raise money from friends and family to get their business started.
This means a whole army of people are investing in a startup because of a personal connection to an individual entrepreneur, not necessarily because they have scoured the market looking for the right opportunity.
While some will have business experience to draw upon, others may not, and they are simply helping a loved one to get on in life.
Further evidence that business experience is not a prerequisite for startup investment comes from the world of celebrity.
As we have reported previously, famous people are being increasingly drawn to startup investment. Many are singers, actors and ex-sportspeople. Few are seasoned business pros. Yet there are plenty of successes among their investments.
Clearly, business experience is not mandatory for the budding startup investor - but it can be a major advantage for both the investor and the entrepreneurs they choose to back. Having that knowledge, experience and understanding can be extremely beneficial for all involved in startup investing.
Patience is a virtue
Take angel investment as an example, a type of investing that’s considered a form of ‘patient capital’ – understandably, given that investors may wait five to 10 years for a return on investment.
Anyone that has successfully built a business towards an exit point is likely to be comfortable with playing this long game. Entrepreneurial and business success requires the implementation of plans that often span several years. Leaders within these enterprises must remain focused on the end goals, adjusting accordingly when performance falters.
To a first-time entrepreneur, the support of an investor who has already learned the value of a stoical, patient approach to business can be invaluable. There will undoubtedly be regular 'wins' along the way, but that end goal can take many years to come - and understanding that from the off can make the entire process a lot easier.
A good judge of character
That experience can make itself apparent in other ways, too, such as with people - most individuals with years of board-level business experience will have hired and fired key staff at some point.
They may also have been at the sharp end of pivotal deal negotiations and sat in on numerous pitches from would-be suppliers.
In many instances, having good character assessment skills will have been crucial. The success of their business could have depended on their judgement on whether the individuals before them were trustworthy.
Similarly, when investors meet a prospective startup opportunity, their assessment of the management team is key. They must decide whether the intentions of the founders are genuine and how likely it is that they will achieve their goals.
They are also gauging how well they will personally get on with the management team over the several years it could take to reach an exit.
For the entrepreneur, having a business leader with good people-judging skills on board could be beneficial in other ways too. As an outsider, they may be able to pick up on certain members of the management team who are not right for the business, or suppliers which do not have the startup’s best interests at heart - or even where there are perhaps unseen gaps in the company that would benefit from being filled.
Knowing when to step in or stand back
Similarly, business people from an entrepreneurial background may themselves have been supported by startup investors. They will therefore have some understanding of how investor-investee relations work. If they had a harmonious partnership with their financial backers, they may seek to replicate this when they become the investor.
They could also have negative experiences to call on. Perhaps they suffered an overly interfering investor – or one that failed to support them when they needed guidance.
Having these experiences can prove particularly important as an investor into startups. Not every startup will need a complete hands on approach, but conversely, not all will expect you to be a silent investor. By understanding the business requirements, an experienced business person who is now an angel investor can accurately determine when their knowledge is most required.
A good nose for an opportunity
This ability to read the landscape can prove beneficial in other areas, too. For instance, despite what Dragons’ Den would have us believe, choosing to invest in a startup is a fairly lengthy process. Sophisticated investors want to build up as accurate a picture as possible about the size of the opportunity, and the challenges ahead.
Two crucial considerations here are the business model and the market. The potential investor is looking for signs that the startup is targeting an attractive market, and has the robust and workable model to exploit it.
Business experience may have honed their ability to evaluate products, models and markets and to pick up on hidden flaws that could arise in the future - and to make a decision as to whether these are reasons not to invest or ones you believe the startup could be mentored to successfully overcome
If we moved to the more money-orientated part of an investment, while valuing early stage businesses is highly challenging, there are few better placed to go in-depth than battle-hardened entrepreneurs. Those that have already successfully built and sold businesses appreciate what the journey to a desirable exit entails, and the unexpected setbacks that could be thrown up along the way.
Significantly under or over-valuing a startup at the outset can lead to strained relationships between the investor and entrepreneur, and cause numerous problems in the future. An investor with years of entrepreneurial experience should have the skills to negotiate investment based on a fair valuation.
This experience will also give them a good understanding of day-to-day cash-flow management, the capital required to win and keep customers and navigating the road to liquidity - all of which can be crucial to making a confident investment.
And when it comes to being confident, having experience of the industry can be key. From the startup’s point of view, those looking to disrupt an age-old approach in a particular sector may seek the support of an industry veteran.
Their inside knowledge of the status quo, and how to shake it up - or what’s missing or needed to truly stand out - could help to unlock the startup’s potential.
Often, such experts come to startup investment because of their recognition of the need to change an industry. Their involvement, through investment, enables them to support innovation and to share the expertise they have built up over many years.
Investing in startups as an experienced business professional - or not
Now of course, the above skills and traits don't always come from being in business, but when you've been either an entrepreneur or an employee, you've had the opportunity to develop a fantastically diverse array of skills. From people management to budget setting, succeeding time and time again is obviously great, but it doesn’t mean you can’t be a successful startup investor if you don’t - if you’ve failed on occasion, you know more than anyone else what mistakes other startups need to avoid.
And whilst startup investing may once been restricted to the business professionals who had amassed an enviable level of wealth, the ease of access to opportunities - and the vast array of them available - means that most business people can become involved.
But this also means that people who aren’t experienced in business can get involved. Low investment thresholds - ours at GrowthFunders is just £100 - means you can add startups to your investment portfolio without a huge amount of financial risk. It’s of course important you complete your own due diligence, but you can test the water and see if this asset class works for you without the need to invest heavily.
And so whilst most would agree those who have experience in business are best placed to invest in startups due to their knowledge and experience, the low barriers to entry today mean that almost anyone can get involved if they want to explore the world of startup investing.