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Investing in startups is a lot more than just buying “stock” in a company. For investors who have come to the table with a history investing in publicly listed companies or the property market, it’s easy to think that backing startups is largely a “set and forget” strategy.
It’s also just as common for startup founders and CEOs to place too much focus on the amount of money raised, and the pre-money valuation rather than the value that each investor can bring to the table.
That’s not to say all money has to be “active money,” but if you are looking to get into the best deals at the seed (or even Series A) stage, it’s often a huge advantage if you are an investor who brings more than just money to the table.
If you think about it more deeply, why wouldn’t you want to help the startup in any way you can? Making introductions, giving insights, helping them avoid mistakes all increase the chance of that company’s success (and by proxy the likely outcome you will achieve as an investor.)
Here’s some common ways you can provide value to startups you invest in.
Chances are if you are backing startups, you have had some level of success in your career. This also means you are likely to have a network of other successful people around you such as entrepreneurs, business owners, senior managers at large corporations. All of these people could potentially be customers for the startup you just backed.
The longer you’ve been in the startup game, the larger your network is likely to be. Ask yourself, where is your startup currently struggling? What could be improved? Perhaps you know a Marketer, a Developer or Sales Manager that could fill a gap in one of the startups you back.
Relationships with other investors not only benefit you but also the startups you fund. Building out your own network of other Angel or Seed investors increases the quality of your deal flow. You will hear about new and exciting startups sooner and potentially be invited to fill out a round.
In addition to that, very few startups only raise once. Chances are if things are going well (or even not so well,) those early stage startups you were so passionate about 12 or 18 months ago will be coming to the market again asking for more money. Do you have relationships with other investors at the next stage of the investment lifecycle? I.e. if you back seed stage startups, do you have a good network of investors at the Series A stage.
And while no startup or Founder should rely on investors to get them that next stage of funding, we all know a warm introduction is better than a cold one.
Perhaps one of the biggest areas you can add value as an investor is with specific industry knowledge. Not all startup founders have domain expertise in the area they choose to build their company (or if they do it may not be as extensive as yours).
You may already use this as a filter for the types of startups you back. For example, if you have had a long career in the finance industry it’s only natural that you can add more value to a fintech startup than an e-commerce store.
In industries where there is increased regulatory compliance, such as fintech, this can often be even more valuable than you or the founder initially anticipates. Can you help or advise the startup on how to avoid red tape, or at least put them in touch with someone who can? What about understanding some of the complexities around financial law or regulation that you dealt with in a previous role.
Beyond that, even just acting as a sounding board on how the industry typically operates can help uncover new opportunity or avoid areas with unnaturally high risk.
In a similar vein as industry knowledge, you may have operational experience or a specific skill set, such as marketing, human resources, financial management. While this doesn’t mean you need to put your hand up to run this aspect of the company you can at least advise the startup on appropriate new hires, or if they should be looking to implement something sooner rather than later.
The earlier you back a startup the more important this is likely to be. A team of two or three who are juggling developing the software/solution, fundraising, marketing, etc may very easily overlook something to do with financial management or human resources. Can you help them avoid an impending mistake because you have seen similar circumstances before?
A more informal role could involve you providing feedback on the effectiveness of their currently marketing strategies or cash flow management (depending on your expertise).
While no one ever wants to lose money we all know that backing startups mean taking the losses, as well as the winners. Often investing in startups is seen as an all or nothing endeavor. But that doesn’t always have to be the case.
However, if a company is not going so well is there any way you can help engineer an acquihire or potentially sell off some of the company’s IP on the way out.
This is obviously not the outcome you all hoped for when you originally backed the company, but if you can help put employees in touch with other startups looking for staff or retain some proportion of your investment that is a better result than letting all that time and effort go completely to waste.
Plus, founders and entrepreneurs talk. They will appreciate that you helped engineer a soft landing, even if it was in part out of self-interest, rather than just walking away completely when things were crashing down.
The overall arching theme across all of these concepts is to leverage your network and experience, to act as a sounding board for the startups you have invested in, and to increase their chances of success. Even if you can only shift the needle a few percentage points, over a number of years investing that could have a significant effect on the performance of your portfolio (and individual companies you back).
Creating a reputation as an investor who truly backs their founders can often make you an investor of choice. Getting you into better deals, and potentially on better terms. And that alone should be worth the effort of a few conversations and phone calls.
Bio: Paul Towers is a 3 x Entrepreneur and the Founder & CEO of Task Pigeon, a web application that makes it easy to create, assign and manage the tasks you and your team work on each day. Paul is also a passionate supporter of the startup ecosystem and regularly mentors other startups and student entrepreneurs.