What happens when an excited mind meets a problem waiting to be solved? What happens when an inquisitive brain searches for probabilities of things that can happen? What happens when an individual thinks about issues in a manner that defies norms? Entrepreneurship is just the start of these experiments. Ever imagined what the world would be had there been no entrepreneurs? Nor can I.
Entrepreneurial capital, along with intellectual potential, is the cornerstone of all successful entrepreneurial ecosystems. There is no evolution without intellectual potential. The perseverance that entrepreneurs show in creating and failing in their entrepreneurial process is what defines venture success. So let’s start with the basic paradigm that startups are not companies. And they never will be. The parameters and thesis that define corporate success may not apply to them.
A startup is an experiment. The entrepreneur or a group of people with the acumen to identify an opportunity and match their skills, create a solution to meet the opportunity or gap. They possess the necessary skills to execute the vision, or have the capability of executing the skills. They acquire physical and financial resources to launch the business and share the ownership of the product, and thereby wealth is created. Now that is the rosy picture of how everyone thinks entrepreneurship works. However, do remember: A startup is an experiment. That means that the agility of action and results determine how easily and deftly the idea will pivot into a more productive execution, which eventually determines if the experiment will hold itself through to market acceptability.
Opportunity assessment and validation is therefore the most important function for a pivotable startup. Good opportunities address important market needs. On examining social, technological, and economic trends, an entrepreneur can identify emerging needs. A good opportunity can then be worked on when it matches the entrepreneur’s capabilities and interests, exists in a favorable context, exhibits the potential for sustainable long-term growth, and facilitates the acquisition of required resources.
New ventures are often initiated by people who have experienced significant problems in their own lives. As an investor, the decision is not only to assess the validity of the idea but also to determine the execution of the venture. As an investor, I would categorize start up investments as follows:
An investment to increase the value of a product or service. This could be by way of improved performance, quality or experience.
An investment to seek new applications to vary the usage of an existing technology or process.
An investment to create mass markets for existing products.
An investment to improve the supply chain and market growth of a successful startup.
An investment in business or manufacturing process innovations, which are huge drivers for return on investment.
An expansion of geographies or regions of customer growth.
A customization startup, which customizes a product or service for a target audience that is niche.
A convergence of industries, which is another growth area for entrepreneurial acumen. For example, genetic engineering is the convergence of electron microscopy, micromanipulation, and supercomputing.
A consolidation of industries. This could be the automobile manufacturing industry, cable and satellite TV broadcasters, and telecommunications carriers.
As a rule of thumb, the investment of time, money and effort in the venture should be less than what it will be worth in two years, with a probability of large returns in four years. The outcome variably depends upon:
A solid analysis of the current and expected industry conditions leading to a viable opportunity.
Whether you can exit with minor losses if the opportunity turns out unfavorably.
Whether potential future gains are significant.
The capability of the entrepreneur to execute the strategy.
Whether the customer will buy.
Only one or two very good opportunities are needed in a lifetime. Invest less time, money, and effort in the venture than it will be worth in one or two years. Calculate the probability of a large return in four years. Carry out a solid analysis of the current and expected conditions of the industry where the opportunity resides.
Risk is the chance or possibility of loss. This loss could be financial, physical or reputational. When Christopher Columbus embarked on his first voyage to the New World, he risked financial, reputational and bodily harm. Most, perhaps almost all, people are risk-averse or risk-avoiders. A startup investor is a risk lover. In a portfolio of experiments, this investor is willing to take a risk on a large number of pivotal business outcomes in the hope of one or a few of them developing into ventures.
I categorize startup investors into three states of mind. The first is the “real estate” investor—the ones that only invest for returns and kill experimentation with clinical due diligence. They normally invest within their networks. The second is the “one might click” investor. These investors will spread cash across ventures with the hope that one out of 100 may exit favorably. The third is the “go where no one’s gone before” investor. These are the ones who are changing the world. So you dream of living on Mars; these are the people that are making it possible for you to someday realize your dreams. These investors may not invest for immediate returns. They are investing to be a part of a future that may take a long time in realization.
I tell most of the entrepreneurs who approach me; taking an investor on board is as important a decision as marriage is. Investor alignment is critical to the survival of any venture—especially ones that are experimental in nature. As an investor, the gain is not only monetary. Startup investing is a vocation. To work with entrepreneurs who have ideas to solve problems or create a change is a process of understanding, learning, strategies, evaluation and execution. It requires the investor to be a mentor, a guide, a networker and sometimes even pulling up their sleeves to steer the startup. Investing in startups is a state of mind—the state of mind where risk is the joy and uncertainty is both a return and a reward.