In life it’s generally true that the less you know about something the better it sounds. That can be really dangerous from an investment perspective. When you're investing in technology businesses it's very easy to be bamboozled by the jargon and get excited about building the next big thing. As an investor, you've got to be disciplined and aware of what you don’t understand.

Jd

You never know what you’re getting

Investors want to believe that they’re going to be involved in the next Google, Facebook or ResMed but the reality is that most startups fail. As an investor you’re trying to pick that diamond in the rough.

The reality is that you never know the full story on day one because investing is complex. There's so many things at play - the entrepreneurs, the management team, the market. When a business raises money things are also going to change - hopefully for the better - but you never know until you've put your money in.

It’s important to try to mitigate this risk by doing good due diligence on the company, the product, the opportunity and the entrepreneur so you can go in with your eyes wide open. At a VC stage we typically do a SWOT (Strengths, Weaknesses, Opportunities & Threats) analysis and focus on the weaknesses and threats to really understand what needs to happen in the first 100 days. We then create a 100-day plan that addresses those weaknesses.

While we like to think we're informed we still make mistakes. Investing is a bit like getting married. No one gets married expecting to get divorced yet 50% of marriages end. Things change, people change - you just can’t predict what's going to go wrong.

The reality is that you never know the full story on day one because investing is complex. There's so many things at play - the entrepreneurs, the management team, the market. When a business raises money things are also going to change - hopefully for the better - but you never know until you've put your money in.

Being informed doesn’t always prepare you for the worst or the best

To make a good investment you have to filter out the noise and look at the core value proposition. Understand what the market opportunity is, how hard it’s going to be to build the product, reach a critical mass and be successful.

One of the secrets to good investing is getting to know the entrepreneur - don’t make a split second decision based on one meeting. First impressions are important, but it's only after you make the investment that you really work out the calibre of the people that you’ve backed. It’s one of the reasons raising venture capital can take up to 12 months - it allows us to get to know the entrepreneur and for them to get to know the investors as well - it's a two-way relationship.

It's hard to appreciate the impact that one person can have on a business until you've actually seen it - both on the upside and the downside. For example, The Preston Group was struggling to get critical mass, so we recruited a new CEO who was experienced and had good judgment. He brought the team, the company and the stakeholders along on the journey and did a fantastic job - it was inspiring.

Peter Farrell at ResMed is another example. He’s an outgoing and charismatic guy who built a fantastic team of people who stayed loyal to him. That's one of the reasons that ResMed has been such a fantastic success and continues to be 20 years later.

Another thing to look at is the founding team's dynamics. This can kill a business but it can be really hard to understand until you’re right in the middle of it all. One investment we had went bad pretty quickly because the relationship between the two founders was poisonous. It embarrasses me that we hadn't worked out that these two people hated each other before we invested. When things got tough their relationship literally fell apart and eventually one of them had to leave.

Investors are biased towards the upside - if you focus too much on the downside you'd never make an investment. But when it comes to early stage angel investing there's no such thing as the perfect deal. You have to make an informed leap of faith - understand the upside and appreciate the downside and prepare to find plenty of surprises along the way.

John Dyson is Investment Principal at Starfish Ventures

This content forms part of the Scale Angels Investor Education Program. To sign up, visit https://scaleinvestorsed.com.a...

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