Eduard Fiyaksel, Elected Chairman of Administrative Board in National Association of Business Angels (NABA), President of Startup Investment Association of Business Angels and a professor at HSE, made a short beginner’s guide for entry-level venture investors.
From a very beginning it is important to understand that traditional business and a venture one are like apples and oranges. They have in common only one trait: investor’s intent to earn money. The rest is completely different.
Of course, you can argue that any business in Russia is a venture. But venture business has its own risks nonetheless, namely a risk of the absence of demand for developed product.
You can have a unique technology and you did everything great, but chose a wrong time to launch. The market isn’t ready yet. And it’s really hard and expensive — to make a market or readjust an existing one. Oleg Tinkov made it, but that’s more of an exception.
The one who is willing to become a venture investor has to immediately adopt two things:
You have to understand how much money you can risk. When someone goes into venture business he or she must estimate his or her risk capital. And also you have to be psychologically prepared to lose. For example, I have one hundred units and now I am ready to lose no more than two of them.
You have to understand that you are a newcomer. And if you are going to do it alone, the risks rise sharply. That’s because you can’t make a head or tail of this particular branch or technology, or how to rise and develop startups. So I recommend going with someone experienced. That’s why concepts of syndicates and lead investors exist. It is a person who is willing not only to invest in a project but also to support it with his or her knowledge and experience.
What to learn?
A potential investor has to be educated: through the examples, cases, failures and risks. One has to understand that only 1 or 2 projects of 10 knock the cover of the ball. A couple more will achieve the level of regular business, the rest will just pass by and that is a normal situation. You have to teach how to lose money and how to make them collectively. Only after the newcomer will participate in several syndicates, understand the field and specify the branch in which he or she could be a leader, it will be possible to try lead-investing or managing the syndicate. That’s all incremental and a long-term development. Who to go into venture investing
I suggest that a newcomer should be smart, well-educated, experienced in applying innovations and have a good understanding of what the smart money is.
When a newcomer tries to go solo and take a controlling stake. After that, a motivation of founders goes low and they just abandon a project.
Often investors control a project too much or too little — both lead to a situation when a team becomes circular firing squad: everyone does things in his own way. “Catch and carry” principle do not sit well in the venture business. You have to do things collectively in here.
Sometimes people say to me: “He came up with such good idea, his company became so big, and all that’s left for him is 10%. How come?” And founders also ask: “10% — is that even something?”. I answer: “Now you have 100% and your company worth 1000 rubles, and then you’ll have 10%, but your company will worth 10 million. What is better?”
Is it a good idea to go venture now?
Actually, it is a good time to invest. There is less investment money, founders and entrepreneurs are more compliant and a number of good projects are still the same because they started earlier. You can buy a share in better projects for less money. Generally, you can’t invest in the branch when it is at its peak — that’s a failure from the start. Let’s recall dot com crisis, a bubble that bursted in 2000. In 1998-1999 banks and generally everyone invested huge amounts of money. You could write an idea on a napkin and get millions to realize it. But those who invested after crisis made good money in 2001-2002 — you could gain profit with fewer funds.
It’s still a good time because there’s nothing to invest in. Ask those who have some free money — they don’t know where to invest, especially in our country, because the juiciest slices are taken by companies affiliated with state or bureaucrats. Investing in your own business is also dangerous because of sanctions and stagnation of the national economy.
What’s good in the venture business is that you can invest a moderate amount of money and, after several years, get good income. All the more so a lot of startups are seeking for entrance to global market now and therefore fall outside of stagnation of Russian economy. In general, I am an optimist and I believe that venture business in Russia will not die but will grow and develop.
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