Actor Audrey Hepburn once said that ‘to plant a garden is to believe in tomorrow’. The same could be said about startups. In a lot of ways, the willingness for individuals to embark on the startup journey – whether it be as founders, team members or investors – is a willingness to believe in tomorrow. The very human motivators of fear and greed are inevitably intertwined into the decision to invest, but the return on investment can be much more than fiscal. It’s not so much a question of why we ‘need’ to invest in startups, as it is why we should want to.
Startups are hyper-innovators driven by crazy ambition and insight (and yes, sometimes naivety) to charge into the unknown. Mature organisations of course have innovation agendas – whether they involve significant research and development budgets or corporate innovation frameworks – but often the core DNA of these cultures are missing. The fundamental alignment of the individual and the outcome means that it’s difficult to replicate the innovation pressure-cooker of a startup in a larger organisation, without that methodology being part of its core business model.
This is why startups are our outside bets in the innovation cycle where mistakes must be made and breakthroughs must be discovered in order for business to continue. It comes with the territory that they are high risk. But at the same time, if executed the right way, they can yield exponential returns compared to other more traditional investment classes, including non-fiscal returns of investment like education, entertainment and impact. What makes startup investing interesting compared to other investment classes is that often startups can’t (and shouldn’t) be able to provide the level of forecasting or comparable market data as other investment propositions.
The Investment Approach
This affects the way that they are valued and the types of data points that an investor would typically look for in making a decision. Investing into startups, by default, requires a different approach, to which Bill Gross’s ‘Ted Talk’ provides a great foundational overview. Here are a few things that I feel are important to consider:
- Gain a deep understanding, not only of the problem that the startup is solving, but the driving factors to why that problem exists and why now is the time for a solution.
- Use whatever means you have at your disposal to gain exposure to quality deal flow.
- Invest alongside others – group investment and co-investment is a growing space for a reason.
- Take a portfolio approach, always.
- Don’t get fixated on financial forecasts. Understand the drivers to the startup’s growth – and its customer acquisition.
For most investors, startups comprise a small part of their overall portfolio for good reason. However, it’s often these same investments that provide the most social and entertainment value. These investments are the ones that we speak to our friends about, follow intently, and gain more excitement and motivation from – for better or worse – than anything else in our portfolio. This is important for startups to note as well: You can’t over communicate with your investors. Engage them in the right way, and they will be there through thick and thin.
The Co-Investment Trend
Co-investment is becoming an increasingly proven portfolio strategy, with co-investment deals having more than doubled to USD 104 billion since 2012. Non-traditional investor education through early stage startup and technology investment clubs have seen seed investing become a team sport, with opportunity sharing and co-investment becoming as viable a strategy as ever to invest successfully. We are seeing a spike in time-poor, cross-stakeholder leaders looking to better capitalise on their own networks to unlock knowledge capital.
By inviting investors along for every stage of the venture ideation and build, startups can tap into another method to measure a venture’s likelihood of success. This validation helps investors move forward with confidence, and with an evolved level of due diligence that they have been a part of conducting. It’s an opportunity for startups to take investors along for the journey, through the ups and the downs, and far beyond quarterly reports. Today’s investors are also thought leaders in the spaces where they operate, so it makes sense that they want to be on the front line.
Investing in startups that understand this will lead to more successful investment in the startup space. Investing in the startup space is also an opportunity to invest in projects that align with a desired impact. This can allow investors to steer a burgeoning industry of interest (for example, sex technology or virtual and augmented reality) by contributing capital to the parts of it that they believe in. It’s an opportunity that palpably calls the shots on that industry’s potential, and future.
The cycle of life that occurs in nature – propagation, growth, maturity, decay and replenishment – is the same one that occurs in business. In every industry and every country, we are experiencing an exponentially accelerating rate of change driven by technology, connectivity and the environment. Whether our motivation to invest in startups is in responding to increased market pressure or in seizing new opportunities, we have little choice but to place these bets on the future. Let’s make ours count.