[Janus]

I've recently invested in a tech startup (well aware of the risks and probability of success) that is undergoing its 2nd round of VC financing. It's a tech-based startup in the fashion industry.

Does anyone else have experience investing in small private companies or startups?

 

[james4beach]

We help assess tech startups at my current company, and we do VC-style investment. These have very low probability of success, and the key is to look for something that can offer 10x to 100x return in the case of success. Confidence in the management is key... you have to use your gut to detect bullshit, flakiness, or lack of motivation.

It's more of an art than a science, so it has a lot to do with how you read people and your street smarts. Are they a con artist? Are they a bullshitter? Are they a drug addict? A slick talker with no clue what they're doing? A disorganized person who lacks follow-through? Someone who is likely to flee the country and take your money? (This does happen)

Simply doubling or tripling your money isn't worth the VC investment. Make sure the 10-fold return is possible, at least!

Talk to the people... a lot. Research and understand their field, and ask them lots of detailed questions. Make sure their strategy makes sense. Look them directly in the eyes. Our CEO has a rule of thumb... if you detect anything that's off, or makes your gut uneasy, then you bail ... there is no room for doubt here.

Don't misinterpret this as values/morality, but I have zero tolerance for drug use. Drug use is extremely common in society and someone under the influence can not, in my opinion, make the sharp decisions needed to achieve success. Or their drug habits get the better of them and before you know it, your investment is funding some guy's cocaine-fuelled party binge. This is just my opinion and my advice, DO NOT lend money to drug addicts. (You mention the fashion industry, so I'd be careful there)

 

[humble_pie]

janus i have confidence in you & this sounds like a fascinating story. Might you be able to share more info?

all details - what they do, how you found them, what do you like about them, how you analyzed risk - would be interesting. AFAIK there have never been any VC or angel investor stories in cmf forum so yours would be a first.

wishing you every success with this.

 

[RBull]

Only my own, which I financed myself.

 

[Just a Guy]

I've got a buddy who's a very successful angel investor, but he does a lot of due dillegence...and I do mean a lot. Before he puts money in, he probably knows to company, people and industry better than parents know their children. He's often heavily involved at the board level and, as said before needs at least a tenfold return.

He's had a number of home runs, but it usually takes several years.

 

[Plugging Along]

I have invested in several. They are high risk, and you are really investing in management as James said. It is less about the idea or concept, though that is a factor, and more if you think the people will be able to execute the idea. There are a lot people with great ideas, only a very few can make money out of it. Look at if they have done this before, do they follow through, are they one to give up when things get hard, or do they bounce back.

Returns should be high such as 10x more, but I have found on reality, it often isn't when it comes in payout at least in my cases.

I think investing 10k for a big payout at a young age will be worth it. The advice my dad had was go for it now, because even if you lose it all the. You still have time to make it back up.

 

[Brad911]

To do it properly you have to do a lot of homework. Agree - management is key. Having a brilliant idea doesn't mean you're capable of growing something from an idea into a multi million dollar company.
I've done these assessments twice for a client and in each situation I told them the very real risk that the current owner(s) weren't going to be able to lead on their own. In one situation they hired an experienced manager and the other the company went on their own path believing they could evolve on their own.

They need a lot of support and guidance, but if the idea, service or product is worth while then try to take a considerable stake so you can influence decisions and who they bring in to help carve the path to success

 

[kcowan]

and don't forget that you have a 1 in 10 chance to make 10:1 on your money!

Also watch out for who else is at the table. If lots of options have been handed out to VCs, you may get diluted when the stock moves. A 10 bagger for VCs might be a 2 bagger for you.

Also avoid pink sheets like the plague. Most of those are pump and dump material. The going public event should be supported by solid performance numbers.

 

[gt_23]

and don't forget that you have a 1 in 10 chance to make 10:1 on your money!

Do you realize that this is a losing proposition? Probably not the best to offer advice on this topic when you have no understanding of risk/reward and statistics.

This illustrates why DIY investors are so surprised when their trades move against them: they usually take far too much risk without realizing it and the market doesn't punish them most of the time, which then provides the confirmation bias they use to think they are market wizards.

 

[mrPPincer]

granted this is just a theoretical supposition, but given that, say you do have a 1 in 10 chance to make 10:1 on your money, it is not necessarily a losing proposition because each of the other nine picks would not likely go to zero; some might even be winners..

.. as well, the stock in question could be anywhere on the map from zero to ten or more so, the math is not quite so simple..

*IMHO.. I am not a statisician

 

[gt_23]

.. as well, the stock in question could be anywhere on the map from zero to ten or more so, the math is not quite so simple..

Actually it is, since VCs (professional ones at least) manage their portfolios based on statistics.

"Successful" VCs invest where the rewards are significantly out of proportion with the risks, the positive Black Swan or some variant. If you happen to succeed anyway, it is purely by chance, only slightly better than purchasing a lotto ticket.

 

[mrPPincer]

ok, well, please excuse my ignorance, (still thinking the maths of my above comment is accurate), & I should probably have checked before commenting, but what does the acronym VC stand for? :stupid:

edit* nvm-> Venture Capitalist

 

[gt_23]

ok, well, please excuse my ignorance, (still thinking the maths of my above comment is accurate), I should probably have checked before commenting, (probably should have checked this first ), but what does the acronym VC stand for? :stupid:

Venture capitalist (or more likely VC firm).

If you do the analysis, don't forget, the VC seeks this extraordinary return even after his time, direct costs, and overheads. Furthermore, he is likely to have a higher than average cost of capital, particularly if he has to wait a long time to realize his profits (or losses).

 

[Janus]

Thanks for all the useful replies. This is a fascinating discussion.

janus i have confidence in you & this sounds like a fascinating story. Might you be able to share more info?

all details - what they do, how you found them, what do you like about them, how you analyzed risk - would be interesting. AFAIK there have never been any VC or angel investor stories in cmf forum so yours would be a first.

wishing you every success with this.

The reason I found this is because one of my best friends for over a decade is a co-founder of the startup. As your warning signs go up, I'll say up front that he has never in his life asked for money from me, nor has he asked for my money for this venture. They are doing a round of VC funding, and *I* asked to be able to contribute because I like the business. They don't need my money, but I want some equity.

My investment is roughly 0.1% of the company and 7% of my net worth (early days for the latter). I'm not in any real sense financing this thing... just buying a small stake for myself.

The company could *very* easily grow in valuation by 10x. 100x is also not out of the question, though of course not the likely outcome.

In terms of the people involved, I couldn't have more confidence in the team. I could list off their impressive paper credentials but we all know what matters is their ability to get things done. And all I can say is I have total belief in that ability.

And @james4beach, no worries about drug habits here. The NYC girl is into fashion in the business sense, she's not a cokehead model.

 

[lonewolf]

To invest you might have to be accredited investor, If you are job well done.

Putting 7% on the table is to high a percentage, Can you go with a lower percent or perhaps have 3 other investors join you if there is a minimum investment amount.

If you invest I hope these guys have an understanding that the mood of the masses effects the fashion industry & the trend of increase in optimism is about to shift to an increase in pessimism as the cycle goes from risk on to risk off.

 

[lonewolf]

A lot of IPOs come to market @ historic market tops. Buying one of the many start ups that come to market near a market top is something hopefully I never do. Based on the bullish sentiment out there this is not the time to put money on the table. Is this thread a red flag warning that the bull is about to end ?

 

[kcowan]

Do you realize that this is a losing proposition? Probably not the best to offer advice on this topic when you have no understanding of risk/reward and statistics...

I invested this way in the 90s. Out of ten risky start-ups, one will be a dog, one a star, and the rest nothing special. I got my 2 10x and then decided the work and risk was not worth it. Those other 8 were a drag. Ended up ahead overall and I loved my winners. But I learned a lot about the style of the players in the space. You really do need access to the insiders.

 

[Janus]

To invest you might have to be accredited investor, If you are job well done.

Putting 7% on the table is to high a percentage, Can you go with a lower percent or perhaps have 3 other investors join you if there is a minimum investment amount.

If you invest I hope these guys have an understanding that the mood of the masses effects the fashion industry & the trend of increase in optimism is about to shift to an increase in pessimism as the cycle goes from risk on to risk off.

I don't need to be an accredited investor, and I'm not one.

7% sounds like a lot but my base is low. It's like 3 months worth of savings only.

A lot of IPOs come to market @ historic market tops. Buying one of the many start ups that come to market near a market top is something hopefully I never do. Based on the bullish sentiment out there this is not the time to put money on the table. Is this thread a red flag warning that the bull is about to end ?

This isn't an IPO, I'd be very lucky if the company was able to IPO - you're right, that's when hype is at its highest. That's when I'd sell.

 

[Plugging Along]

I have been in similar situation. I know the people very well, trust them, and they DONT need the money from me.

Do not think of it as 7% of your networth, look at how much would it really impact you of you lost it, how long would it take you to make it back up, and how much of a difference if it does come through. 3 months of savings is nothing especially at your age. When you are young you can take the risks because it the big scheme of things it won't be that much. If it does come through it can really make a difference.

When I have done my vc adventures, it was money that though I didn't want to lose, but could lose.

 

[humble_pie]

(to janus) you've done your homework perfectly. It's not only a perfect undertaking for a young career professional in finance, but it's also perfectly sized. If you lose all, it won't hurt in the least, but it will certainly make a lovely bittersweet story.

(to Plugging) you're spot on about quality of management. But don't you think this goes for microcaps & small cap stocks as well? I was writing about this over on the Temple REIT thread, how i thought CEO arni thornsteinsson was solid as a rock.

canada is jam-packed full of resource promoters, many of whom are flim-flams flogging ventures that are questionable or worse. In fact our VSE is infamous worldwide for a high volume of sleaze. Horrible fact, but true.

i think with small caps it's always necessary to look carefully at management's profile, at their track records, at their associates, check whether any scandal or raw prior failure has tainted their history, etc. I must confess that in mining i even want them to have graduated from a prestigious school such as colorado or queen's!

i look for the T&C words - management has to be Trustworthy, they have to be Competent - long before i even think of looking at their earnings history or their financing or their balance sheets. Small companies can go through challenging times, even perilous times, which is when T&C count for everything.

again, best wishes to janus. I suspect his venture is going to work out great.