Things you need to consider before investing in new Ilon Mask How not to go bankrupt: rules for investing in startups
Rule #1: reputation analysis. Imagine the situation. A venture capitalist holds business meeting with young startupper who invented a universal translator. They have already reached agreements on investing in the project and are about to sign the shareholder’s agreement. Some details remain to be discussed. And now, in the middle of the conversation, the investor’s phone rings. The unknown person informs that he knows about the planned transaction and offers to listen to information before all formalities are settled.
The investor agrees with curiosity. According to the caller’s words, the young entrepreneur is a fraud. He uses his idea as a cash-cow – he pulls money out of investors and then disappears. Having weighed everything, the investor still ignores the strange unknown righteous man. The young entrepreneur showed himself well at the stage of negotiations and description of the idea, moreover, he was firmly in control of the project figures.
So the contract is signed. Everything seems to be going smoothly, but after a few months the prodigy startupper suddenly faces insurmountable difficulties, and the project collapses. The decisions made by the young entrepreneur turned out to be short-term, the declared terms and stages of the project implementation were not fulfilled. The investor has to fix losses due to unsuccessful investment.
All of the above is quite real example. However, such problems can be avoided by the timely involvement of forensics experts who specialize in identifying unreliable subjects through the OSINT/HUMINT procedure, which focuses on comprehensive analysis of person’s reputation using a variety of information sources, both open and closed.
Success of the startup is predictable
Rule #2: feasibility study. Any startup can be assessed and understood both in terms of its market prospects and the level of efficiency of the business models used by its management. The purpose of the feasibility study is to determine the basic parameters of the startup financial model, which is ICMS – Idea, Cost, Marketing, Sales. Having made correct prediction in the context of these indicators, the probability that the startup will not be included in the valley of death will increase significantly.
This is what the investor in the above example has not done or has done badly. In this case, he went even further and openly ignored the warning about the danger.
Unfortunately, such embarrassing failures are common among investors. Like any purchaser, they are penchant for advertising and loud promises. Charm (even if this is an important and famous person) and loud promises can still not come true. Theranos and Elizabeth Taylor, its founder, are clear proof of this. The other recent example is shut down of Yogome startup due to accusations of fraud and incompetent management of its founder.
Any startup must be carefully checked before investing. For this purpose, there are many types of check-ups, some of which are feasibility studies and forensic check-ups, which are designed to study the financial model of a startup and to track the movement of all financial flows within the project for their intended use, excluding fraudulent schemes.
Personal participation in startup development is also important. For this purpose, there are special tools (SCRUM, Deming cycle, Agile, Kaizen, Lean etc.) designed to assess the performance of the business as a whole and by segments.
Obviously, such approaches carry risks as well. For example, check-ups and meetings take time and often happens that parties simply do not have that time. But on the other hand, any kind of check-up can be done in an express form, i.e. 3-5 days before spending time on a project. In this period you will not get an understanding
of all aspects of a startup, but you will have accurate information about the main financial indicators, as well as you will know more about the reputation of people with whom you negotiating the deal.
Artem KovbelPartner, Head of Financial Investigations