Avoiding Angst When Investing in Start-Ups

By Nicholas Anderson, Editor-in-Chief of FinnishNews
I have spent most of my career in start-up activities in big and small companies. This was possible because I was born in 1948 and since then many new ideas developed in the following decades. The first start-up was in 1965 when my school was the first in Europe to receive a computer. I was lucky to be invited to do my university exams in computer mathematics using Fortran to solve mathematical and statistical problems. Starting in 1967, I paid my way through university with well-paid computer work in Helsinki during the summer holidays over the next 5 years.
After university I worked in banks and started to develop skills with new global financial business of eurobonds, syndicated loans, investment funds, and interest rate swaps. All of the above were then new innovations that eventually developed into huge markets well beyond my wildest dreams.
In 2013, I retired from banking and decided to do real work by investing in small Nordic companies and start-ups. I wanted to give something back to Finland that had offered me so many career opportunities. I did not want to stay around in banking because I see them as jaded by their relentless ambitions to grow through consolidation and overwhelmed by regulation.
Investing in startups was a good decision, but also a demanding and frustrating experience. It took a couple of years for me to understood what to do and what to avoid.…
The most important rule is to avoid start-ups that are run by people who are only in the business because of the money. Greed is a not an easy characteristic to spot because it has several different forms and can be hidden from unwary investors.
Be cautious when the founders tell you that their ideas are disruptive and commercially sound. Founders must invest their time and money to establish a business – there are few fast fixes. If they say that they need financing to start to develop their ideas, design systems, and attract clients then it is generally better to say that you will not invest at this stage. In most cases founders should work to get the basics working and tested without outside funding.
When a start-up founders want a “market salary” to develop the business with angel investors’ cash, then think twice before you invest. You might want to invest if the company can start to generate a strong net profit from day one, but that situation is as rare. Most founders work hard for years to get the company afloat and do not expect to get paid more than the absolute minimum in the first year, if anything. Few start-ups make a profit in the first years, but they should be generating meaningful revenues.
Make sure that the founders have useful and commercially sound plans and the right competences to develop the business. If they do then they will be one of the few out of hundreds of start-ups. Most start-ups fail because they really have no useful commercial purpose or do not have the right skills to develop the business.
Watch out if the founders want to employ others to do the work they should be doing. It is often a sign of trouble when a newly formed start-up begins by hiring a consultants and lawyers to do basic start-up work. Young companies do need outside help, but that normally comes later when plans have been made and product ideas tested. If the founders cannot handle the start themselves then you may ask if they competent to develop the company.
Even a good business may fail if the founders are the wrong types to develop and create the necessary growth. It is challenging to develop a new company. It takes hard work and the willingness to sacrifice years of your life. It puts huge pressure on families because the days only have 24 hours and the weeks only 7 days. The required effort to manage sales, to develop a team, to achieve fast growth is demanding especially because investors soon loose patience to cover recurring monthly losses.
Here is a checklist for the required characteristics to be ticked off against the founders’ names – it must be a diverse group and not just a one-man show:
  1. Founders can plan systematically
  2. They are able to build a good team and secure an active board and advisors.
  3. They must have sufficient financial resources and plenty of stamina to get things moving.
  4. They can take failure and carry on as determined as before even if they must change direction.
  5. They can sell and develop their business in domestic and foreign markets. This means that they must have language and cultural abilities. Finland is too small for most start-ups, and finding foreign markets requires extraordinary and rare selling skills.
One of the good places to check is to examine their CV’s and LinkedIn accounts – you will be surprised about what can be discovered in seconds.
The final advise is that you can easily loose your hard-earned savings with poor investment decisions or with simple bad luck. Keep each investment round modest in relation to your savings and be ready to invest more if justified. Network with colleagues and stay in regular contact with the founders. Make your own notes about the meetings and ask questions. This is your money and the risks of failure are bigger than the possibility of making money if you do not follow these basic rules.
This article was first published in Swedish in the Finnish Business Magazine “Forum för ekonomi och teknik” – June 2021

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