Right now, we’ve got a really difficult mix of high rates and low investor confidence. Start-ups rely on 2 things: loads of capital + cheap debt. Start-ups are fast-growing and they need tons of money to get things off the ground.
They burn through VC cash like I burn through chocolate! They use this money to fail fast and fail often. And to pay salaries, obvs.
Now onto the debt bit and why it matters. Taking on cheap debt means those precious start-ups aren’t bogged down by crazy-high interest payments. Instead, they can use their cash to focus on what really matters: growing their biz.
When rates are as high as they are, most investors wanna be putting their cash into more normal and safe places.
Why risk all that money when you can literally lose it all if you can chuck your cash into a bank or Apple – who gave us a savings account that beats the big banks.
Read all about that here and how it actually might get us to spend more instead of save more! Investors can now also earn a few percent on gov bonds. Safe stuff. Practically risk-free.
That’s why stocks are sinking. They’re a way riskier bet than bonds with lower rewards right now.
Of course we all know that in the long term, stocks are the best place to be, it’s the short term that they get shoved aside in favour of the boring-but-safe stuff. More risk = more reward but the “more risk” seems to be showing up right now. But hang in there!!
And if you think stocks are risky business, just wait till you meet start-ups. They’re stocks on steroids. You’ve got a risk scale: cash is the safest, start-ups are the riskiest. Yeah, with a whole bunch in between!
Low chance of hitting a winner; but super-high rewards if you can!
Most VCs and private investors (the ones who are crazy enough and rich enough to back start-ups – I’m in the 1st camp, obvs) wanna back the unicorns. The ones that could, maybe, one day, reach the $1 billion mark. It’s like hitting the jackpot.
But start-up success is like a 1 in a million. Not really, but close. More than 90% of start-ups fail and flop. And the rest, if you were lucky enough to have actually invested in them, will net you oodles of cash.
Start-ups are where the magic happens. New ideas, new ways of doing things and new ways of seeing the world. Think of the biggest and best companies out there – they all began as a start-up. And usually in someone’s backyard!
This goes to show it’s not where you start that matters but where you end up.
More risk = more reward
Start-ups can really give you that reward bit but you gotta be okay with the risk. Spread your money across a handful of start-ups (if not a few pairs of hands) and if you’re in the UK, you can use some really tax-busting ways like SEIS/EIS schemes as well as VC investment trusts. All these offer income tax relief and ways of growing your money TAX-FREE.
While all these things exist to make it easier for investors to back start-ups, you’ve still gotta factor in the riskiness of it all.
The money you invest in these kind of ventures should not be money you need. Anytime soon. While you can definitely get in with the click of a few buttons, you can’t exactly get out like that!
The only 2 ways you can get your money back is if the start-up gets bought out or if they go IPO. Otherwise, you can kiss goodbye since this is as illiquid as investing gets. Case in point: a family friend of mine invested in 2 start-ups in his early 40s. And he only got his money back 25yrs later!
Some things you should look out for when you back a biz!
I was crazy enough to invest in some start-ups in my late teens. Okay that sounded way cooler than it actually was. I invested in 2 when I was 19. I had heard they were fundraising and wanted to be a part of what they were building.(Psst: if you’re curious – here’s how my start-up journey began & how it’s going!)
I got to meet the founders of the biz and I was sold. They were so honest and humble. I’ve seen how easy it is for companies to take investors’ money and do what the heck they want with it. I bet you’ve experienced this too!
Funds you’re invested in that do nothing but take your fees. Or worse, banks that use deposits (aka your money) to make stupid and risky bets.
It’s easier to take risks with other people’s money than with your own.
If you’re lucky enough to be in a position where you can back a business, look for the people behind it. Put people first; businesses second. That’s how you pick winners.
A fund manager told me if he doesn’t gel with the founder, he won’t buy his stocks. No matter how good of a product he sells or service he can offer.
It’s not always easy but he said trust your gut. Not so scientific! But hey, investing is more of an art than anything else. You gotta go with what feels right. For You!
Look at the team they’ve got around them. Get to know them and learn what they’re all about. That should give you a pretty idea of what you’re getting yourself into. Jeff Bezos has this great rule: no meeting should be so big that 2 pizzas can’t feed them all.
This can be taken a step further. In the early stages of a start-up, there’s no need to have a gazillion staff. Since wages are one of the biggest (and fixed) costs a biz has, you wanna keep ’em low(ish). Start-ups that are able to manage with a few staff rather than more tell you about their efficiency.
Whenever I see a start-up that already has several full-time staff, I start to get a little nervous.
These guys aren’t profit-making, nowhere near it. Often, they’re just trying to get a product/service off the ground. And guess what a huge chunk of raised capital goes towards? Paying workers!
So dig into their staff. See if they’re all needed and whether they’re overestimating things.
How start-ups deal with the bad tells you way more than how they deal with the good
2 years ago I invested in an agritech firm. They were doing well. In that time, they managed to double their share price and win contracts from all sorts of really well-known guys in the industry.
But then came the most vicious rate-rising cycle since the 1980s. They started to struggle. Their contracts were being trimmed and last week, one of their big investors pulled out.
But you wanna know what they did?
They held a zoom call with their investors to tell them what’s going on. They were honest and transparent. And as an investor, what more can I ask for. No one can prepare for these things but you can choose how you respond.
They did this despite being nervous and terrified at not being able to pay their workers unless they get some capital ASAP. They had the hard convos. They didn’t shy away. And that says a lot about their character and grit.
I seriously hope they get their funding because they’ve got an amazing AI product that could literally change farming but sometimes businesses fail.
Not because they’re terrible and deserve to. No. But because sometimes times are simply too tough and their potential wasn’t seen. I hope that doesn’t happen but now I’m prepared for the worst.
This is one story of what I bet are thousands. And now that regional banks from the likes of SVB whose main clients were start-ups btw – it’s gonna hurt the entire industry.
It’s a gigantic setback. But start-ups are nimble. They’re resilient. And the ones that are able survive this brutal bear market are gonna be some of the best businesses we’ve ever seen. Seriously.
If you don’t believe me, check out history! Wanna know which businesses were born right before the dot com bust and made it out alive? The ones we know and love and can’t get enough of from the likes of Amazon and Google. Our tech giants. So have a little faith.
The worst of times can create the best of businesses.
Don’t be so quick to give up just yet.
Disclaimer: This blog is not investment or financial advice. It is my opinion only. This blog is not a personal recommendation to buy/sell any security, or to adopt any such investment strategy. Always do your own research before you commit to any investment.