In our new ‘Guide to Investing’ blog series, we’re taking you through the highs and lows investors might experience during their journey. In this blog, we talk about the importance of becoming indifferent, to help you through the highs and the lows of startup investing.
In the beginning, most investors have a positive and enthusiastic attitude towards investing. They start by choosing several startups to invest in, and they often invest relatively easily during the first years. Then they eagerly look forward to a return on their investment.
But often getting results takes way longer than expected. It can take 7 to 10 years before you can see a cash return. For many first time investors, this realisation comes a little late. Sometimes startups don’t send monthly updates to investors to keep them on board either, which can increase frustration even further since the investment cash has gone down a black hole.
Most investor portfolios include startups that fail. Some startups do very well, but usually, they don’t get there without some setbacks along the way. Many companies need more cash than expected because their forecasts weren’t even close to reality.
Every portfolio has both good and bad startups. (If you have a portfolio with only winners, please call us, we would like to learn from you.) The tricky thing is that the bad news comes first: the startups that aren’t doing well will fail after a relatively short time. The startups that are doing well will take longer to become the full success stories that they are capable of being. So as an investor you first get a beating, and after a long wait, you will get some reward.
For this reason experienced investors develop a special kind of indifference: the highs and lows affect them less, although of course they still have to care.
Focus on success
Usually, investors will choose a few favourite startups over time. If you have made 10 investments, you can choose 3-5 startups which you like best. This makes sense: better to focus your time on the ones you have the most trust in, and which you like working with, than to equally distribute your time amongst all your investments.
Here also you need to develop a special kind of investor indifference: learn to somehow distance yourself from your companies. If you are able to direct more capital to the most successful startups in your portfolio over time, then you are also making sure that a larger share of your portfolio is in better companies. That also means you have to give less support to your least performing companies, logically.
Of course, on the road to success, there are always unexpected developments, so you usually have to keep betting on several horses. If you start your portfolio with a broader range of companies, you can be more selective in follow-up rounds, picking only the very best companies to put more cash into.
What if the startup is doing well, but they are not keeping their investors engaged and updated? Well, that’s not smart behaviour by the startup: investors may lose interest, and the startup usually needs more help from those investors at some point.
Nonetheless: it happens. Investors should try to make sure that they have a contract which allows them to demand updates. Everyone should do their part, right? This mechanism can help to prevent unwanted situations. Of course the investor should always keep in mind that time spent on writing updates is not time spent on serving the startup’s customers. Updates are not an aim in themselves.